UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 27, 2002
October 3, 2003
Commission file number 1-5560
SKYWORKS SOLUTIONS, INC.
(Exact
Skyworks Solutions, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2302115
(State
| Delaware | 04-2302115 | ||||
|---|---|---|---|---|---|
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| 20 Sylvan Road, Woburn, Massachusetts | 01801 | ||||
|---|---|---|---|---|---|
| (Address of principal executive offices) | (Zip Code) | ||||
| Registrant's telephone number, including area code | (781) 376-3000 |
Securities registered pursuant to Section 12(b) of (I.R.S. Employer
incorporation or organization) Identification No.)
20 SYLVAN ROAD, WOBURN, MASSACHUSETTS 01801
(Addressthe Act:
None
Securities registered pursuant to Section 12(g) of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 376-3000
the Act:
Common Stock, $.25 par value
(Title of Class)
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 Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] 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'sregistrant’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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12B-2)12b-2).
[X]
[X] Yes [ ] No
The aggregate market value of the Registrant's votingregistrant’s common stock held by non-affiliates of the Registrantregistrant (based on the closing price of the registrant’s common stock as reported on the Nasdaq National Market on December 4, 2002)the last business day of the registrant’s most recently completed second fiscal quarter (March 28, 2003)) was approximately $1.4 billion.$913 million. Shares of votingcommon stock held by each executive officer and director and by each shareowner
affiliated with a director have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of officer or
affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant's Common Stock,registrant’s common stock, par value $0.25 per share, as of December 4, 2002November 28, 2003 was 137,899,732.
148,746,520.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this annual report incorporates by reference certain information contained in the registrant’s definitive proxy statement for the Annual Meeting of Shareholders to be held March 10, 2004, which will be filed with the Securities and Exchange Commission not later than 120 days after October 3, 2003 (the “Proxy Statement”). Except with respect to information specifically incorporated by reference in the Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
TheExhibit Index is located on page 88.
87
Page 1 of 8887 pages.
SKYWORKS SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED SEPTEMBER 27, 2002
OCTOBER 3, 2003
TABLE OF CONTENTS
Skyworks, Breakthrough Simplicity, the star design logo, DCR, iPAC, LIPA, Lynx, Pegasus, Polar Loop, Single Package Radio, SPR, System Smart, and Trans-Tech are trademarks or registered trademarks of Skyworks Solutions, Inc. or its subsidiaries in the U.S. and in other countries. All other brands and names listed are trademarks of their respective companies.
CAUTIONARY STATEMENT
This Annual Report on Form 10-K (including the following section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) and other documents we have filed with the Securities and Exchange Commission (“SEC”) contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, and are subject to the “safe harbor” created by those sections. Words such as “believes,” “expects,” “may,” “will,” “would,” “should,” “could,” “seek,” “intends,” “plans,” “potential,” “continue,” “estimates,” “anticipates,” “predicts,” and similar expressions or variations or negatives of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report on Form 10-K. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements. Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements involve inherent risks and uncertainties and actual results and outcomes may differ materially and adversely from the results and outcomes discussed in or anticipated by the forward-looking statements. A number of important factors could cause actual results to differ materially and adversely from those in the forward-looking statements. We urge you to consider the risks and uncertainties discussed elsewhere in this report and in the other documents filed with the SEC in evaluating our forward-looking statements. We have no plans, and undertake no obligation, to revise or update our forward-looking statements to reflect any event or circumstance that may arise after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.
In this document, the words “we,” “our,” “ours” and “us” refer only to a Vote of Security Holders 10
Part II
Item 5: Market for the Registrant's Common Equity and Related Stockholder 10
Matters
Item 6: Selected Financial Data 11
Item 7: Management's Discussion and Analysis of Financial Condition and 13
Results of Operations
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 36
Item 8: Financial Statements and Supplementary Data 37
Item 9: Changes in and Disagreements with Accountants on Accounting and 65
Financial Disclosure
Part III
Item 10: Directors and Executive Officers of the Registrant 66
Item 11: Executive Compensation 68
Item 12: Security Ownership of Certain Beneficial Owners and Management 73
and Related Stockholder Matters
Item 13: Certain Relationships and Related Transactions 75
Item 14: Controls and Procedures 77
Part IV
Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K 78
Signatures 83
Certifications 85
Subsidiaries
not any other person or entity.
PART l
ITEM 11. BUSINESS
SUMMARY
Skyworks Solutions, Inc. ("Skyworks"(“Skyworks” or the "Company"“Company”) is a leading wireless semiconductor company focused exclusively on radio frequency (RF)(“RF”) and complete cellular system solutions for mobile communications applications. We offer front-end modules, RF subsystems and cellular systems to topleading wireless handset and infrastructure customers.
From the power amplifier, through the radio and to the baseband, we have developed one of the industry'sindustry’s broadest product portfolioportfolios including leadership switches and power amplifier modules. Additionally, we offer a highly integrated direct conversion transceiver and have launched a comprehensive cellular system for next generation handsets.
With our extensive product portfolio and significant systems-level expertise, Skyworks is the ideal partner for both top-tier wireless manufacturers and new market entrants who demand simplified architectures, faster development cycles and fewer overall suppliers.
Skyworks was formed through the merger ("Merger"(“Merger”) of the wireless communications business of Conexant Systems, Inc. ("Conexant"(“Conexant”) and Alpha Industries, Inc. ("Alpha"(“Alpha”) on June 25, 2002. FollowingImmediately following the Merger, the Company purchased Conexant’s semiconductor assembly and test facility located in Mexicali, Mexico and certain related operations (the “Mexicali Operations”). Shortly thereafter, Alpha changed its corporate name to Skyworks Solutions, Inc. We are headquartered in Woburn, Massachusetts, and have executive offices in Irvine, California. We have design, engineering, manufacturing, marketing, sales and service facilities throughout North America, Europe, and the Asia/Pacific region. Our Internet address is
www.skyworksinc.com.www.skyworksinc.com. We make available on our Internet website free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 filings on Forms 3, 4 and 5, and amendments to those reports as soon as practicable after we electronically file such material with the SEC.Securities and Exchange Commission (“SEC”). The information contained in our website is not incorporated by reference in this Annual Report on Form 10-K.
RECENT DEVELOPMENTS
On November 13, 2002, Skyworks successfully closed a private placement of $230
million of 4.75 percent convertible subordinated notes due 2007. These notes can
be converted into 110.4911 shares of common stock per $1,000 principal balance,
which is the equivalent of a conversion price of approximately $9.05 per share.
The net proceeds from the note offering were principally used to prepay debt
owed to Conexant under a financing agreement entered into with Conexant
immediately following the Merger. The payments to Conexant retired $105 million
of the $150 million note relating to the purchase of Conexant's semiconductor
assembly, module manufacturing and test facility located in Mexicali, Mexico,
and certain related operations ("Mexicali Operations") and repaid the $65
million principal amount outstanding as of November 13, 2002 under the loan
facility, dissolving the $100 million facility and resulting in the release of
Conexant's security interest in the assets and properties of the Company.
In connection with the prepayment by the Company of $105 million of the $150
million note owed to Conexant relating to the purchase of the Mexicali
Operations, the remaining $45 million principal balance on the note was
exchanged for new 15% convertible debt securities with a maturity date of June
30, 2005. These notes can be converted into the Company's common stock at a
conversion rate based on the applicable conversion price, which is subject to
adjustment based on, among other things, the market price of the Company's
common stock. Based on this adjustable conversion price, the Company expects
that the maximum number of shares that could be issued under the note is
approximately 7.1 million shares, subject to adjustment for stock splits and
other similar dilutive occurrences.
In addition to the retirement of $170 million in principal amount of
indebtedness owing to Conexant, we also retained approximately $53 million of
net proceeds of the private placement to support our working capital needs.
INDUSTRY BACKGROUND
We believe that cellular services and personal communications services are
increasingly expanding to offer more than just traditionalthe wireless industry is on the verge of another substantial growth cycle. Traditional voice services with
emerging mobile communications technologies offering consumers and businessesoffered by wireless access to data and information across a wide range of applications.
High-speed mobile access hascarriers are being rapidly supplemented or augmented by the potential to dramatically enhance useemergence of the Internet, thereby facilitating the growth of electronic commerce. At the centernext-generation wireless technologies and WiFi-based (802.11) wireless data applications. All of these developmentsnew technologies are the continuing evolutiongeared to make high-speed wireless data available on handset, PDA, notebook and other platforms in a variety of the mobile phone and the
corresponding growth of the wireless communications infrastructure.
environments.
The cellular handset market has grown considerablysignificantly over the past five years with
unit sales of approximately 400 million units in 2001, according to Gartner
Dataquest, a market research firm, up 500% from 1996 levels. As additional
wireless cellular capacity became available, an intensely competitive pricing
environment for wireless services developed atdespite the same time that lower-priced,
feature-rich mobile phones were being introduced, contributing substantially to
the growth of new subscribers. We expect this trend to continue, enabling
further wireless expansion and increased market penetration worldwide. Market
penetration measures the portion of users or subscribers within the entire
population of a specified geographic area. In the
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Skyworks Solutions, Inc. and Subsidiaries
United States, market research firm EMC forecasts a growth in wireless
penetration from approximately 46% in 2001 to almost 75% by 2005. On a worldwide
basis, market penetration of wireless phones was just 16%broad technology slowdown in 2001 and could
approach 30% by 2005, based on data from EMC. We believe that this anticipated
dramatic market growth will create significant demand for wireless handsets as
well as for wireless infrastructure equipment to meet future network capacity
requirements.
New mobile phones with improved battery life and expanded features are being
introduced at a rapid rate, made possible by significant technological advances
that render earlier models obsolete after only one or two years.2002. According to market research firm Strategy Analytics,EMC, handset sales have increased by approximately 300% from 1997 to 2002 with volume reaching 400 million units in 2002. Exiting 2002, the worldwide penetration rate of wireless services was at 18% and is expected to climb to 28% by 2005. This increased penetration implies that approximately 650 million new subscribers will begin using wireless services over the next three years, approaching the 1.8 billion worldwide subscriber mark in 2005 – roughly halfa fourth of the 2001 worldwide
cellularworld’s population.
In parallel, handset growth is being driven by replacement units purchased by existing subscribers as carriers introduce updated models, smaller form factors, added features and new applications. In particular, color displays and camera phones are expected to be two major growth drivers in the coming years. According to the Shosteck Group, sales of color-display phones will increase from roughly 85 million units in 2002 to over 350 million units by 2005. Meanwhile, handsets with built-in cameras are forecasted to increase from 20 million units in 2002 to almost 250 million units by 2005. These new wireless phones will also feature higher data rate services driven by 2.5G and 3G standards such as GPRS, CDMA 2000, EDGE and WCDMA. According to EMC, the combination of new subscriber additions and higher replacement rates is expected to drive total handset sales were replacements of previous models. We expect this
replacement marketfrom 400 million units in 2002 to continue contributing to the growth of the digital
cellular handset industry, led by the transition to next generation services,
such as CDMA2000, GPRS and EDGE wireless standards, which support wireless data
capacity. We anticipate that transition to third-generation services, which will
enable even higher bandwidth applications, including streaming video, digital
audio and digital camera functionality, should further bolster the replacement
market. Additionally,approximately 544 million units in emerging markets where wireline infrastructure is
inadequate or limited, we believe that digital wireless networks are providing a
viable and economic alternative that can be rapidly deployed.
2005.
In response to this rapidly changinggrowing market, handset original equipment manufacturers, or OEMs, are significantly shortening product development cycles, seeking simplified architectures and streamlining manufacturing processes. Traditional OEMs are shifting to low-cost suppliers around the world. In turn, original design manufacturers, or ODMs, and contract manufacturers, who lack RF and systems-level expertise, are entering the high volumehigh-volume mobile phone market to support OEMs as well as to develop handset platforms of their own. Original
design manufacturersODMs and contract manufacturers canseek to manage low-cost handset manufacturing and assembly, of handsets, freeing OEMs to focus on the higher
value marketing and distribution aspects of their business. Established handset manufacturers and new market entrants alike are demanding complete semiconductor system solutions that include the radio frequencyRF system, all baseband processing, protocol stack and user interface software, plus comprehensive reference designs and development platforms. With these solutions, traditional handset OEMs can accelerate time-to-market cycles with lower investments in engineering and system design. These solutions also enable original design
manufacturersODMs to enter the high volume handset market without the need to makerequiring significant investments in RF and systems-level expertise.
Similarly, cellular and personal communications services network operators are developing and deploying next generation services. These service providers are incorporating packet-switching capability in their networks to deliver data communications and Internet access to digital cellular and other wireless devices. Over the long-term,long term, service providers are seeking to establish a global network that can be accessed by subscribers at any time, anywhere in the world and that can provide subscribers with multimedia services. To meet this goal, OEMs whothat supply wireless infrastructure base stations to network operators are increasingly relying on mobile communications semiconductor suppliers whothat can provide highly integrated radio frequencyRF and mixed signal processing functionality.
Additionally, as service providers migrate cellular subscribers to data intensive next generation 2.5G and 3G applications, base stations that transmit and receive signals in the backbone of cellular and personal communications services systems will be under further capacity constraints. To meet the related demand, OEMs will be challenged to increase base station transceiver performance and functionality, while reducing size, power consumption and overall system costs.
We believe that these market trends create a potentially significant opportunity for a broad-based wireless semiconductor supplier with a comprehensive product portfolio supported by specialized wireless manufacturing process technologies and a full range of systems-level expertise.
BUSINESS OVERVIEW
Skyworks is a leading wireless semiconductor company focused exclusively on RF and complete cellular system solutions for mobile communications applications. We offer front-end modules, RF subsystems and cellular systems to topleading wireless handset and infrastructure customers. Skyworks operates in one business segment,
which designs, develops, manufactures and markets proprietary semiconductor
products and system solutions for manufacturers of wireless communication
products.
Skyworks possesses a broad wireless technology capability and one of the most complete wireless communications product portfolios, coupled with customer relationships with virtually all major handset and infrastructure manufacturers. Our product portfolio includes almost every key semiconductor found within a digital cellular handset, including:
- switches and filters (components that switch signals and incorporate
filtering functionality);
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Skyworks Solutions, Inc. and Subsidiaries
- power amplifier (PA) modules (devices that amplify a signal to
provide sufficient energy for it to reach the base station);
- RF transceivers (devices that perform radio frequency transmit and
receive functions);
- synthesizers (devices used to tune to the correct channel to receive
the RF signal from the base station);
- mixed signal processors (devices that convert analog signals into
digital signals);
- digital signal processors (DSP) (digital devices that act as the
cellular handset's central processor);
- audio (components that enable voice communication);
- physical interface DSP firmware (channel coding and equalization
software);
- network access software (protocol stack supporting encoding and
decoding); and
- MMI/applications (user interface software).
handset.
The following diagram illustrates our products that are used in a digital cellular handset:
[SEMICONDUCTOR GRAPHIC DIAGRAM]
HIGHLY INTEGRATED SEMICONDUCTORS
Filter Receiver Mixed Signal
Switch Synthesizer DSP
Front End Modules — PA Module Transmitter Audio
Physical Interface Network Access MMI/
DSP Firmware Software Applications
COMPLETE SYSTEM SOFTWARE
Modules are increasingly integrating band-select switches, t/r switches, diplexers, filters and other components to create a single chip front end solution
| o | Switch: performs the transmit and receive switching as well as band switching for cellular handsets |
| o | Power Amplifier (“PA”) Module: amplifies signal to provide sufficient energy to reach a base station |
RF Subsystems/SPR™ Solution: combines the transceiver, PA and associated controller, SAW filters, and a switchplexer module that includes switches and low-pass filters in a compact 13x13mm MCM package
| o | Receiver (“Rx”): receives the RF signal from the antenna, down-converts the signal and delivers it to the baseband |
| o | Transmitter (“Tx”): transmits the RF signal to the PA Module |
| o | DCR Transceiver (“Tx/Rx”): encompasses the complete RF transmit and receive functions |
Complete Cellular Systems
| o | Hardware: includes all the RF devices referenced above, as well as baseband processors that handle mixed-signal functions (converting analog signals to digital) and ARM/DSP digital devices that act as the cellular handset’s central processor |
| o | Software: complete handset software with protocol stack and customizable user interface ("MMI") |
| o | Worldwide Development Support: comprehensive layout, integration, factory and field test; necessary to bring new entrants to market quickly |
Skyworks also offers a broad product portfolio addressing next generationnext-generation wireless infrastructure applications, including amplifier drivers, ceramic resonators, couplers and detectors, filters, synthesizers and front-end receivers. These components support a variety of radio frequencyRF and mixed signal processing functions within the wireless infrastructure.
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Skyworks Solutions, Inc. and Subsidiaries
We have a comprehensive radio frequencyRF and mixed signal processing and packaging portfolio, extensive circuit design libraries and a proven track record in component and system design. We believe that these capabilities position us to address the growing need of wireless infrastructure manufacturers for base station products with increased transceiver performance and functionality with reduced size, power consumption and overall system costs.
THE SKYWORKS ADVANTAGE
| o | Best-in-Class Wireless Semiconductor and Systems Portfolio |
| o | Market Leadership in Key Product SegmentsCommitment to Technology Innovation |
| o | Commitment to Technology Innovation |
| o | Continuously Developing Unique Component and System Solutions |
| o | World-Class Manufacturing Capabilities and Scale |
OUR STRATEGY
Skyworks'
Skyworks’ vision is to become the leadingpremier supplier of wireless semiconductor solutions. Key elements in our strategy include:
LEVERAGING CORE TECHNOLOGIES
Leveraging Core Technologies
Skyworks deploys technology building blocks such as radio frequency integrated circuits, analog/mixed-signal processing cores and digital baseband engines as well as software across multiple product platforms. We believe that this approach enables creation ofcreates economies of scale in research and development and facilitates a reduction in the time-to-markettime to market for key products.
INCREASING INTEGRATION LEVELS
Increasing Integration Levels
High levels of integration enhance the benefits of our products by reducing production costs through the use of fewer external components, reduced board space and improved system assembly yields. By combining all of the necessary communications functions for a complete system solution, Skyworks can deliver additional semiconductor content, thereby offering existing and potential customers more compelling and cost-effective solutions.
CAPTURING AN INCREASING AMOUNT OF SEMICONDUCTOR CONTENT
Capturing an Increasing Amount of Semiconductor Content
We enable our customers to start with individual components as necessary, and then migrate up the product integration ladder. We believe that our highly integrated solutions will enable these customers to speed time-to-markettheir time to market while focusing their resources on product differentiation through a broader range of more sophisticated, next-generation features.
DIVERSIFYING CUSTOMER BASE
Diversifying Customer Base
Skyworks supports virtually every wireless handset OEM including Nokia Corporation, Motorola, Inc., Nokia Corporation, Samsung Electronics Co., Sony/Ericsson and Sony/EricssonLG Electronics, Inc. as well as emerging original development manufacturers (ODMs)ODMs and contract manufacturers such as BenQ, Compal, Flextronics and Quanta. With the industry'sindustry’s move towards outsourcing, we believe that we are particularly well-positioned to address the growing needs of new market entrants who seek RF and system-level integration expertise.
DELIVERING OPERATIONAL EXCELLENCE
Delivering Operational Excellence
The Skyworks operations team leverages best-in-classworld-class manufacturing technologies and enables highly integrated modules as well as system-level solutions. We are
focused on achieving the industry's shortest cycle times, highest yields and
ultimately the lowest cost structure.
BUILDING INDUSTRY PARTNERSHIPS Skyworks will vertically integrate where it can differentiate or will otherwise enter alliances and partnerships for leading-edge capabilities. These partnerships and alliances are designed to ensure product leadership and competitive advantage in the marketplace. For example, we recently licensed LSI
Logic's digital signal processor core to support future GSM/GPRS baseband
products. Additionally, we work with Advanced Wireless Semiconductor Company
(AWSC), Jazz Semiconductor, Inc.We are focused on achieving the industry’s shortest cycle times, highest yields and United Microelectronics Corporation (UMC)
on a foundry basis.
ultimately the lowest cost structure.
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'manufacturers’ representatives, assuring broader coverage of territories and customers. We also utilize distribution partners, some of which are franchised globally with others specific to North American markets.
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 basedweb-based content. Skyworks'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 partnership allows our team to facilitate customer-driven solutions, which leverage the unique strength of our portfolio while providing high value and greatly reduced time-to-market.
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Skyworks Solutions, Inc. and Subsidiaries
time to market.
We believe that the technical and complex nature of our products and markets demands an extraordinary commitment to close 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
staff.management. We also employ a collaborative approach in developing these partnerships 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 actions 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.
CUSTOMERS
During fiscal year 2003, Samsung Electronics Co. and Motorola, Inc. accounted for 15% and 11%, respectively, of the Company’s total net revenues. During fiscal year 2002, Samsung Electronics Co. and Motorola, Inc. accounted for 38%35% and 12%11%, respectively, of the Company'sCompany’s total net revenues from
customers other than Conexant. During fiscal year 2001, Samsung Electronics Co.
and Nokia Corporation accounted for 44% and 12%, respectively, of the Company's
total net revenues from customers other than Conexant.revenues. As of September 30, 20022003 Samsung Electronics Co. accounted for approximately 27%18% of the Company'sCompany’s gross accounts receivable. The foregoing percentages are based on sales representing the Mexicali Operations' and the wireless business of Conexant'sConexant’s sales for the full fiscal year during 2001 and2002 up to the fiscal 2002 pre-Merger period through June
25, 2002,time of the Merger, and sales of Skyworks, the combined company for the post-Merger period from June 26, 2002 through the end of the fiscal year.
year and for fiscal 2003.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We own or licenseare 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, and licenses,
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 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. We believe that our technological 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;time to market; new product innovation:innovation; overall product quality and performance; price; compliance with industry standards; strategic relationships with customers: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'customers’ purchasing decisions. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. We cannot provide assurances that we will be able to compete successfully against current and potential competitors.
RESEARCH AND DEVELOPMENT
Our products and markets are subject to continued technological advances. Recognizing the importance of such technological advances, we maintain a high level of research and development activities. We maintain close collaborative relationships with many of our customers to help identify market demands and target our development efforts to meet those demands. Our design centers are strategically located around the world to be in close proximity to our customers and to take advantage of key technical and engineering talent worldwide. We are focusing our development efforts on new products, design tools and manufacturing processes using our core technologies.
Our research and development expenditures for fiscal 2003, 2002 and 2001 and 2000 were $151.8 million, $132.6 million and $111.1 million, and $91.6 million, respectively.
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Skyworks Solutions, Inc. and Subsidiaries
RAW MATERIALS
Raw materials for our products and manufacturing processes are generally available from several sources. It is our policy not to depend on a sole source of supply. However,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 against long-term agreements or on individual purchase orders. We do not carry significant inventories and do not have any
additionala limited number of long-term supply contracts with our suppliers. We believe we have adequate sources for the supply of raw materials and components for our manufacturing needs with suppliers located around the world. Raw wafers and
other raw materials used in the production of our CMOS products are available
from several suppliers.
Under a supply agreementagreements entered into with Conexant in connection with the
Merger,and Jazz Semiconductor, we will receive wafer fabrication, wafer probe and certain other services from Jazz Semiconductor, Inc., a Newport Beach, California foundry
joint venture between Conexant and The Carlyle Group.Semiconductor. Pursuant to ourthese supply agreement with Conexant,agreements, we are initially obligatedcommitted to obtain certain minimum volume levelswafer volumes from Jazz Semiconductor based on a contractual agreement between
Conexant and Jazz Semiconductor. Our expected minimum purchase obligations under thisthese supply agreementagreements are anticipated to be approximately $64 million, $39 million and $13 million in fiscal 2003, 2004 and 2005. We estimate that our
minimum purchase obligation under this agreement will result in excess costs of
approximately $5.1 million and we have recorded this liability and charged cost
of sales in fiscal 2002.
2005, respectively.
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 with little or no penalty, we believe that backlog as of any particular date is not a reliable indicator of our future revenue levels.
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.
We believe that our current expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on our liquidity and capital resources, competitive position or financial condition. We cannot assess the possible effect of compliance with future requirements.
CYCLICALITY; SEASONALITY
The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change. Product obsolescence, price erosion, evolving technical standards, and shortened product life cycles may contribute to wide fluctuations in product supply and demand. These and other factors, together with changes in general economic conditions, may cause significant upturns and downturns in the industry, and in our business. PeriodsWe have experienced periods of industry downturns --
as we experienced in fiscal 2001 -- have been characterized by diminished product demand, production overcapacity, excess inventory levels and accelerated erosion of average selling prices. These factors may cause substantial fluctuations in our revenues and our operational performance. We have experienced these cyclical fluctuations in our business in the past and may experience cyclical fluctuations in the future.
Sales of our products are subject to seasonal fluctuation and periods of increased demand in end-user consumer applications, such as mobile handsets. This generally occurs in the last calendar quarter ending in December. Sales of semiconductor products and system solutions used in these products generally increase just prior to this quarter and continue at a higher level through the end of the calendar year.
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Skyworks Solutions, Inc. and Subsidiaries
GEOGRAPHIC INFORMATION
Net revenues from customers other than Conexant by geographic area are presented based upon the country of destination. Net revenues from customers other than
Conexant by geographic area are as follows (in thousands):
| Years Ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||||||
| United States | $ | 87,691 | $ | 72,185 | $ | 63,948 | |||||
| Other Americas | 69,559 | 4,615 | 5,455 | ||||||||
| Total Americas | 157,250 | 76,800 | 69,403 | ||||||||
| South Korea | 157,772 | 237,681 | 142,459 | ||||||||
| Other Asia-Pacific | 218,817 | 114,974 | 23,898 | ||||||||
| Total Asia-Pacific | 376,589 | 352,655 | 166,357 | ||||||||
| Europe, Middle East and Africa | 83,950 | 28,314 | 24,691 | ||||||||
| $ | 617,789 | $ | 457,769 | $ | 260,451 | ||||||
Our revenues by geography do not necessarily correlate to end products that our customers develop may ultimately be shipped worldwide.handset demand by region. For example, if we sell a power amplifier module to a customer in South Korea, we record the sale 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. Accordingly, our revenues by geography do not correlate to end
handset demand by region.
Long-lived assets principally consist of property, plant and equipment, goodwill
and intangible assets.
Long-lived assets by geographic area are as follows (in thousands):
| September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | |||||||
| United States | $ | 101,871 | $ | 109,975 | ||||
| Mexico | 21,223 | 30,427 | ||||||
| Other | 4,671 | 3,371 | ||||||
| $ | 127,765 | $ | 143,773 | |||||
EMPLOYEES
As of September 27, 2002,October 3, 2003, the Company employed approximately 4,0003,800 persons. Approximately 1,100 employees in Mexico are covered by collective bargaining agreements. Management believes that its current relations with employees are
good. We believe our future success will depend in large part upon our continued ability to attract, motivate, develop and retain highly skilled and dedicated employees.
ITEM 22. PROPERTIES
We own and lease manufacturing facilities and other real estate properties in the United States and a number of foreign countries. We own and lease approximately 865,000900,000 square feet and 316,000100,000 square feet, respectively, of office and manufacturing space, respectively.space. In addition, we lease approximately 142,000430,000 square feet of sales office and design center space with approximately 43%22% of this space located in foreign countries. We are headquartered in Woburn, Massachusetts and have executive offices in Irvine, California. The following table sets forth our principal facilities measuring 50,000 square feet or more:
9
Skyworks Solutions, Inc. and Subsidiaries
| Location | Owned/Leased | Primary Function | ||||||
|---|---|---|---|---|---|---|---|---|
| Woburn, Massachusetts | Owned | Corporate headquarters, manufacturing | ||||||
| Irvine, California | Leased | Office space and design center | ||||||
| Newbury Park, California | Owned | Manufacturing and office space | ||||||
| Newbury Park, California | Leased | Design center | ||||||
| Adamstown, Maryland | Owned | Manufacturing and office space | ||||||
| Mexicali, Mexico | Owned | Assembly and test facility | ||||||
| Haverhill, Massachusetts | Owned | Vacant - building and | ||||||
We believe our Haverhill,
Massachusetts operations to our Woburn, Massachusetts facility. Our facility in
Haverhill is currently on the market for sale. We also moved our operations from
our Newport Beach facilities to Irvine, California during the first quarter of
fiscal 2003. Both of these actions are part of our consolidation effort to
minimize costs. Based on this information, we believe that the above facilitiesproperties have been well maintained, are in good repair, meet our existing needs adequatelysound operating condition and contain all the equipment and facilities necessary to operate at reasonable
levels of capacity.
present levels.
Certain of our facilities, including our California and Mexicali, Mexico facilities, are located near major earthquake fault lines. We maintain no earthquake insurance with respect to these facilities.
ITEM 33. LEGAL PROCEEDINGS
From time to time various lawsuits, claims and proceedings have been, and may in the future be, instituted or asserted against Skyworks, including those pertaining to patent infringement, intellectual property, environmental, product liability, safety and health, employment and contractual matters. In addition, in connection with the Merger, Skyworks has assumed responsibility for all then current and future litigation (including environmental and intellectual property proceedings) against Conexant or its subsidiaries in respect of the operations of Conexant'sConexant’s wireless business. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to Skyworks. Intellectual property disputes often have a risk of injunctive relief which, if imposed against Skyworks, could materially and adversely affect the financial condition or results of operations of Skyworks.
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. On June 8, 2002 Skyworks Technologies, Inc. ("STI"),At the present time, we are in discussions with Qualcomm Incorporated regarding claims each of us have filed a complaintand served against the other in the United States District Court in the Centralfor Southern District of California Southern
Division, alleging trademark infringement, false designationasserting violations of origin, unfair
competition,certain of our respective intellectual property rights. The purpose of these discussions is to arrive at a business resolution that avoids protracted litigation for both parties. We believe their claims are without merit and false advertising by the Company. Without a material impact to
the financial statements, the Company reached an agreement onif we are not successful resolving this matter with
STI, which includes a releaseoutside of all pendinglitigation, we are prepared to vigorously defend against their claims and an arrangement for
mutual coexistence using the name Skyworks.
fully prosecute our claims against them.
ITEM 44. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter ended September 27, 2002.
October 3, 2003.
PART II
ITEM 55. MARKET FOR THE REGISTRANT'SREGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol SWKS.“SWKS”. The following table sets forth the range of high and low sale prices for our common stock for the periods indicated.indicated, as reported by Nasdaq. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions. The merger of the wireless business of Conexant with Alpha and the acquisition of the Mexicali Operations ("(“Washington/Mexicali"Mexicali”) was completed on June 25, 2002. Market
10
Skyworks Solutions, Inc. and Subsidiaries price range information for periods on and after June 26, 2002 reflects sale prices for the common stock of the combined company, and market price range information for all periods on and prior to June 25, 2002 reflects prices for the common stock of Alpha on the Nasdaq National Market under the symbol AHAA.“AHAA”. Washington/Mexicali was not publicly traded prior to the Merger. The number of stockholders of record of SkyworksSkyworks’ common stock as of December 4, 2002November 28, 2003 was approximately 48,381.
38,931.
| High | Low | |||||||
|---|---|---|---|---|---|---|---|---|
| Fiscal year ended October 3, 2003: | ||||||||
| First quarter | $ | 12 | .73 | $ | 4 | .00 | ||
| Second quarter | 9 | .57 | 5 | .96 | ||||
| Third quarter | 8 | .10 | 4 | .94 | ||||
| Fourth quarter | 12 | .28 | 6 | .52 | ||||
| Fiscal year ended September 27, 2002: | ||||||||
| First quarter | $ | 31 | .84 | $ | 15 | .64 | ||
| Second quarter | 24 | .24 | 14 | .05 | ||||
| Third quarter, until June 25, 2002 | 17 | .54 | 5 | .22 | ||||
| Third quarter, on and after June 26, 2002 | 6 | .00 | 4 | .71 | ||||
| Fourth quarter | 6 | .00 | 2 | .89 | ||||
Neither Skyworks nor its corporate predecessor, Alpha, have paid cash dividends on common stock since an Alpha dividend made in fiscal 1986, and Skyworks does 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.
RECENT SALES OF UNREGISTERED SECURITIES
On June 25, 2002, in connection with the Merger, the Company issued to Jazz Semiconductor, Inc. a warrant to purchase 1,017,900 shares of the Company’s common stock at a price of $24.02 per share. This warrant is exercisable in increments of 25% as of June 25, 2002, March 11, 2003, September 11, 2003 and March 11, 2004. This warrant was issued in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933 (the “Securities Act”). The Company did not receive any cash proceeds from the issuance of this warrant.
On December 12, 2002, the Company issued 46,211 shares of its common stock to Skyworks Technologies, Inc (“STI”) in connection with the settlement of an outstanding complaint filed by STI alleging trademark infringement, false designation of origin, unfair competition, and false advertising by the Company. The settlement agreement entered into with STI required that the Company issue such shares to STI and that STI release of all of its pending claims against the Company, as well as arranged for mutual coexistence using the name “Skyworks.” The common stock was issued in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act. The common stock issued in this transaction has been registered for resale pursuant to an effective registration statement on Form S-3. The Company did not receive any cash proceeds from the issuance of this common stock.
On November 12, 2002, the Company sold $230 million aggregate principal amount of its 4.75 percent convertible subordinated notes due November 15, 2007 (the “Junior Notes”), in a private placement pursuant to Section 4(2) of the Securities Act, at a purchase price equal to 100 percent of the principal amount at maturity of the notes, resulting in net proceeds to the Company of approximately $222.6 million. The initial purchasers, Credit Suisse First Boston Corporation, CIBC World Markets Corp. and U.S. Bancorp Piper Jaffray Inc., purchased the Junior Notes at 97 percent of the issue price and resold them in private resale transactions to qualified institutional buyers pursuant to Rule 144A of the Exchange Act of 1934, as amended. The Junior Notes are convertible at the option of the holder at any time on or prior to maturity into shares of our common stock at a conversion price of $9.0505 per share which is equal to 110.4911 shares per $1,000 principal amount of notes, subject to adjustment. The Junior Notes are subordinated to our existing and future senior indebtedness (including the Senior Notes discussed below). We may redeem the Junior Notes at any time after November 20, 2005. The redemption price of the Junior Notes during the period between November 20, 2005 through November 14, 2006 will be $1,011.875 per $1,000 principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date, and the redemption price of the notes beginning on November 15, 2006 and thereafter will be $1,000 per $1,000 principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date. Holders may require the Company to repurchase the Junior Notes upon a change in control of the Company.
The net proceeds from the offering of Junior Notes were principally used to retire $105 million of a $150 million note issued to Conexant for the purchase of the Mexicali Operations and to prepay $65 million principal amount outstanding as of November 13, 2002 under a separate loan facility with Conexant, dissolving the loan facility. In connection with the prepayment of $105 million of the $150 million note relating to the purchase of the Mexicali Operations, the remaining $45 million principal balance on this note was exchanged, in a private placement to Conexant pursuant to Section 3(a)(9) of the Securities Act, for an equal principal amount of new 15 percent Interim Convertible Notes due June 30, 2005 (the “Interim Notes”) with a maturity date of June 30, 2005. In addition to the retirement of $170 million in principal amount of indebtedness owing to Conexant, we also retained approximately $53 million of net proceeds of the private placement to support our working capital needs.
On November 25, 2002, the Company issued $45 million aggregate principal amount of 15 percent Convertible Senior Subordinated Notes due June 30, 2005 (the “Senior Notes”) to Conexant, in a private placement pursuant to Section 3(a)(9) of the Securities Act, in exchange for an equal principal amount of Interim Notes which were issued to Conexant in November 2002. The Senior Notes mature on June 30, 2005, unless earlier converted or redeemed. At maturity (including upon certain acceleration events), we will pay the principal amount of the Senior Notes by issuing a number of shares of common stock equal to the principal amount of the Senior Notes then due and payable divided by the applicable conversion price in effect on such date, together with cash in lieu of any fractional shares. The Senior Notes are convertible at the option of the holder into shares of our common stock, at the applicable conversion price as of the related conversion date, at any time prior to maturity at an initial conversion price of $7.87 per share, subject to adjustment for certain anti-dilution events and as follows: in the event that the market price of our common stock is below the conversion price for a specified period, the Senior Notes are convertible into that number of shares of our common stock that is equal to the principal amount of the Senior Notes being converted divided by the market price of our common stock, provided that in no event will the number of shares issued exceed 125 percent of the number of shares that the holders would have received at the initial conversion price. We may redeem the Senior Notes at any time after May 12, 2004 at $1,030 per $1,000 principal amount of Senior Notes to be redeemed, plus accrued and unpaid interest. Holders of the Senior Notes may require us to repurchase the Senior Notes upon a change in control. The Company did not receive any separate cash proceeds from the issuance of the Senior Notes.
For information regarding securities authorized for issuance under equity compensation plans, seeItem 12 of this Annual Report on Form 10-K.
ITEM 66. SELECTED FINANCIAL DATA
You should read the data set forth below in conjunction withItem 7, "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and ourconsolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The Company'sCompany’s fiscal year ends on the Friday closest to September 30. Fiscal 2003 consisted of 53 weeks and ended on October 3, 2003 and fiscal years 2002 and 2001 and
2000 each comprisedconsisted of 52 weeks and ended on September 27, 2002 and September 28, and
September 29,2001, respectively. For convenience, the consolidated financial statements have been shown as ending on the last day of the calendar month. The selected consolidated financialfollowing balance sheet data set forth below asand statements of operations data for the five years ended September 30, 2002
and 2001 and for the fiscal years 2002, 2001 and 2000 have been2003 were derived from our audited consolidated financial statements. Consolidated balance sheets at September 30, 2003 and 2002 and the related consolidated statements of operations and are includedof cash flows for each of the three years in the period ended September 30, 2003 and notes thereto appear elsewhere in this Annual Report on Form 10-K. The selected combined financial data set forth below
as of September 30, 2000, 1999 and 1998 and for the fiscal years 1999 and 1998
have been derived from our combined financial statements that are not included
in this Annual Report on Form 10-K.
Because the Merger was accounted for as a reverse acquisition, a purchase of Alpha by Washington/Mexicali, the historical financial statements of Washington/Mexicali became the historical financial statements of Skyworks after the Merger. The historical information provided below does not include the historical financial results of Alpha for periods prior to June 25, 2002, the date the Merger was consummated. The historical financial information may not be indicative of the Company'sCompany’s future performance and does not reflect what the results of operations and financial position prior to the Merger would have been had Washington/Mexicali operated independently of Conexant during the periods presented prior to the Merger or had the results of Alpha been combined with those of Washington/Mexicali during the periods presented prior to the Merger.
11
Skyworks Solutions, Inc. and Subsidiaries
| Fiscal Year | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 (1) | 2001 (1) | 2000 (1) | 1999 (1) | |||||||||||||
| (In thousands) | |||||||||||||||||
| Statement of Operations Data: | |||||||||||||||||
| Net revenues | $ | 617,789 | $ | 457,769 | $ | 260,451 | $ | 378,416 | $ | 216,415 | |||||||
| Cost of goods sold (2) | 380,465 | 331,608 | 311,503 | 270,170 | 134,539 | ||||||||||||
| Gross profit (loss) | 237,324 | 126,161 | (51,052 | ) | 108,246 | 81,876 | |||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 151,762 | 132,603 | 111,053 | 91,616 | 66,457 | ||||||||||||
| Selling, general and administrative | 80,222 | 50,178 | 51,267 | 52,422 | 27,202 | ||||||||||||
| Amortization of intangible assets (3) | 4,386 | 12,929 | 15,267 | 5,327 | -- | ||||||||||||
| Purchased in-process research and development (4) | -- | 65,500 | -- | 24,362 | -- | ||||||||||||
| Special charges (5) | 34,493 | 116,321 | 88,876 | -- | 1,432 | ||||||||||||
| Total operating expenses | 270,863 | 377,531 | 266,463 | 173,727 | 95,091 | ||||||||||||
| Operating loss | (33,539 | ) | (251,370 | ) | (317,515 | ) | (65,481 | ) | (13,215 | ) | |||||||
| Interest expense | (21,403 | ) | (4,227 | ) | -- | -- | -- | ||||||||||
| Other income (expense), net | 1,317 | (56 | ) | 210 | 142 | (54 | ) | ||||||||||
| Loss before income taxes and cumulative effect of change in accounting principle | (53,625 | ) | (255,653 | ) | (317,305 | ) | (65,339 | ) | (13,269 | ) | |||||||
| Provision (benefit) for income taxes | 652 | (19,589 | ) | 1,619 | 1,140 | 1,646 | |||||||||||
| Loss before cumulative effect of change in accounting principle | (54,277 | ) | (236,064 | ) | (318,924 | ) | (66,479 | ) | (14,915 | ) | |||||||
| Cumulative effect of change in accounting principle, net of tax (6) | (397,139 | ) | -- | -- | -- | -- | |||||||||||
| Net loss | $ | (451,416 | ) | $ | (236,064 | ) | $ | (318,924 | ) | $ | (66,479 | ) | $ | (14,915 | ) | ||
| Per share information (7): | |||||||||||||||||
| Loss before income taxes and cumulative effect of change in accounting principle | $ | (0.39 | ) | $ | (1.72 | ) | |||||||||||
| Cumulative effect of change in accounting principle, net of tax (6) | (2.85 | ) | -- | ||||||||||||||
| Net loss | $ | (3.24 | ) | $ | (1.72 | ) | |||||||||||
| Balance Sheet Data: | |||||||||||||||||
| Working capital | $ | 249,279 | $ | 79,769 | $ | 60,540 | $ | 135,649 | $ | 55,374 | |||||||
| Total assets | 1,090,668 | 1,346,912 | 314,287 | 501,553 | 291,909 | ||||||||||||
| Long-term liabilities | 280,677 | 184,309 | 3,806 | 3,767 | 3,335 | ||||||||||||
| Stockholders' equity | 673,175 | 1,014,976 | 287,661 | 466,416 | 275,568 | ||||||||||||
| (1) | The Merger was completed on June 25, 2002. Financial statements for periods prior to June 26, 2002 represent Washington/Mexicali’s combined results and financial condition. Financial statements for periods after June 26, 2002 represent the consolidated results and financial condition of Skyworks, the combined company. |
| (2) | In fiscal 2001, the Company recorded $58.7 million of inventory write-downs. |
| (3) | Amounts in fiscal 2003 primarily reflect amortization of current technology and customer relationships acquired in the Merger. Amounts in fiscal 2002, 2001 and 2000, |
| (4) | In fiscal 2002 and fiscal 2000, the Company recorded purchased in-process research and development |
| (5) | In fiscal 2003, the Company recorded special charges of $34.5 million, principally related to the impairment of assets related to the Company’s infrastructure products and certain restructuring charges. In fiscal 2002, the Company recorded special charges of $116.3 million, principally related to the impairment of the assembly and test machinery and equipment and the related facility in Mexicali, Mexico, and the write-off of goodwill and other intangible assets related to Philsar Semiconductor Inc. In fiscal 2001, the Company recorded special charges of $88.9 million, principally related to the impairment of certain wafer fabrication assets and restructuring activities. |
| (6) | The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other |
| (7) | Prior to the Merger with Alpha Industries, Inc., |
ITEM 7
MANAGEMENT'S7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risk factors, risks and cautionary statements described elsewhere in this Annual Report on Form 10-K.
OVERVIEW
Skyworks Solutions, Inc. (“Skyworks” or the “Company”) is a leading wireless semiconductor company focused exclusively on radio frequency (“RF”) and complete cellular system solutions for mobile communications applications. We offer front-end modules, RF subsystems and cellular systems to leading wireless handset and infrastructure customers.
On June 25, 2002, pursuant to an Agreement and Plan of Reorganization, dated as of December 16, 2001, as amended as of April 12, 2002, by and among Alpha Industries, Inc. (“Alpha”), Conexant Systems, Inc. (“Conexant”) and Washington Sub, Inc. ("Washington"(“Washington”), a wholly owned subsidiary of Conexant entered into a definitive agreement
providing for the combination of Conexant's wireless business with Alpha. Under
the terms of the agreement,to which Conexant would spinspun off its wireless communications business, into
Washington, including its gallium arsenide wafer fabrication facility located in Newbury Park, California, but excluding certain assets and liabilities, to be
followed immediately by the Merger of this wireless businessWashington merged with and into Alpha with Alpha as the surviving entity in the Merger. The Merger was completed on June
25, 2002.(the “Merger”). Following the Merger, Alpha changed its corporate name to Skyworks Solutions, Inc.
Immediately following completion of the Merger, the Company purchased theConexant’s semiconductor assembly, module manufacturing and test facility located in Mexicali, OperationsMexico, and certain related operations (“Mexicali Operations”) for $150 million. For financial accounting purposes, the sale of the Mexicali Operations by Conexant to Skyworks Solutions was treated as if Conexant had contributed the Mexicali Operations to Washington as part of the spin-off, and the $150 million purchase price was treated as a return of capital to Conexant. Accordingly, our consolidatedFor purposes of these financial results includestatements, the assets,
liabilities, operating results and cash flows of the Washington business and the
Mexicali Operations for all periods presented, and also include the results of
operations of Alpha from June 25, 2002, the date of acquisition. The Washington business and the Mexicali Operations are collectively referred to as Washington/Mexicali. References to the "Company"“Company” refer to Washington/Mexicali for all periods prior to June 26, 2002, and to the combined company following the Merger.
The Merger was accounted for as a reverse acquisition whereby Washington was treated as the acquirer and Alpha as the acquiree, primarily because Conexant shareholders owned a majority, approximately 67 percent, of the Company upon completion of the Merger. Under a reverse acquisition, the purchase price of Alpha was based upon the fair market value of Alpha common stock for a reasonable period of time before and after the announcement date of the Merger and the fair value of Alpha stock options. The purchase price of Alpha was allocated to the assets acquired and liabilities assumed by Washington, as the acquiring company for accounting purposes, based upon their estimated fair market value at the acquisition date. Because the Merger was accounted for as a
purchase of Alpha, the historical financial statements of Washington/ Mexicali
became the historical financial statements of the Company after the Merger.
Because the historical financial statements of the Company after the Merger do not include the historical financial results of Alpha for periods prior to June 26,25, 2002, the financial statements may not be indicative of future results of operations orand are not indicative of the historical results that would have resulted if the Merger had occurred at the beginning of a historical financial period.
Skyworks' fiscal year ends on the Friday closest to September 30. Fiscal years
2002, 2001 and 2000 each comprised 52 weeks and ended on September 27, September
28 and September 29, respectively. For convenience, the consolidated financial
statements have been shown as ending on the last day of the calendar month.
Accordingly, references to September 30, 2002, 2001 and 2000 contained in this
discussion refer to the actual fiscal year-end of the Company.
13
Skyworks Solutions, Inc. and Subsidiaries
Skyworks is a leading wireless semiconductor company focused on providing
front-end modules, radio frequency subsystems and complete system solutions to
wireless handset and infrastructure customers worldwide.
We offer a
comprehensive family of components and RF subsystems, and also provide complete
antenna-to-microphone semiconductor solutions that support advanced 2.5G and 3G
services.
We have entered into various agreements with Conexant providing for the supply to us of transition services by Conexant and for the supply of gallium arsenide wafer fabrication and assembly and test services to Conexant, initially at substantially the same volumes as historically obtained by Conexant from Washington/Mexicali. We have also entered into agreements with Conexant providing for the supply to us of transition services by Conexant and
silicon-based wafer fabrication services by Jazz Semiconductor, Inc., a Newport Beach, California foundry joint venture between Conexant and Thethe Carlyle Group (“Jazz Semiconductor”), providing for the supply to which Conexant contributed its Newport Beachus of silicon-based wafer fabrication, facility.wafer probe and certain other services by Jazz Semiconductor. Historically, Washington/Mexicali obtained a portion of its silicon-based semiconductors from the Newport Beach wafer fabrication facility. Pursuant to
our supply agreement with Conexant, we are initially obligated to obtain certain
minimum volume levels from Jazz Semiconductor based on a contractual agreement
between Conexant andfacility that is now Jazz Semiconductor. We also provide semiconductor assembly and test services to Conexant at our Mexicali facility.
The wireless communications semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. Our operating results have been, and our operating results may continue to be, negatively affected by substantial quarterly and annual fluctuations and market downturns due to a number of factors, such as changes in demand for end-user equipment, the timing of the receipt, reduction or cancellation of significant customer orders, the gain or loss of significant customers, market acceptance of our products and our customers'customers’ products, our ability to develop, introduce and market new products and technologies on a timely basis, availability and cost of products from suppliers, new product and technology introductions by competitors, changes in the mix of products produced and sold, intellectual property disputes, the timing and extent of product development costs and general economic conditions. In the past, average selling prices of established products have generally declined over time and this trend is expected to continue in the future.
BASIS OF PRESENTATION
The financial statements prior to the Merger were prepared using Conexant’s historical basis in the assets and liabilities and the historical operating results of Washington/Mexicali during each respective period. We believe the assumptions underlying the financial statements are reasonable. However, the financial information included herein and in our consolidated financial statements may not be indicative of the combined assets, liabilities, operating results and cash flows of the Company in the future and is not indicative of what they would have been had Washington/Mexicali been a separate stand-alone entity and independent of Conexant during the historical periods presented.
Our fiscal year ends on the Friday closest to September 30. Fiscal 2003 consisted of 53 weeks and ended on October 3, 2003 and fiscal years 2002 and 2001 each consisted of 52 weeks and ended on September 27, 2002 and September 28, 2001, respectively. For convenience, the consolidated financial statements have been shown as ending on the last day of the calendar month. Accordingly, references to September 30, 2003, 2002 and 2001 contained in this discussion refer to our actual fiscal year-end.
CRITICAL ACCOUNTING POLICIES
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. Among the significant estimates affecting our consolidated
financial statements are those relating to allowances for doubtful accounts,
inventories, long-lived assets, income taxes, warranties, restructuring costs
and other contingencies. 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 ourthe 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 recognition is deferred in all instances
where the earnings process is incomplete. Certain product sales are made to
electronic component distributors under agreements allowing
Allowance for price protection
and/or a right of return on unsold products. A reserve for sales returns anddoubtful accounts — We maintain allowances for non-distributordoubtful accounts for estimated losses resulting from the inability of our customers is recorded based on historical
experience or specific identificationto make required payments. If the financial condition of an event necessitating a reserve.
Development revenue is recognized when services are performedour customers were to deteriorate, our actual losses may exceed our estimates, and has not been
significant for any of the periods presented.
additional allowances would be required.
Inventories -- — We assess the recoverability of inventories through an on-going review of inventory levels in relationrelative to sales backlog and forecasts, product marketing plans and product life cycles. When the inventory on hand exceeds the foreseeable demand (generally in excess of six months), we write down the value of those excess inventories. We sell our products to communications equipment OEMsoriginal equipment manufacturers (“OEMs”) that have designed our products into equipment such as cellular handsets. These design wins are gained through a lengthy sales cycle, which includes providing technical support to the OEM customer. Moreover, once a customer has designed a particular supplier's
components into a cellular handset, substituting another supplier's components
requires substantial design changes which involve significant cost, time, effort
and risk. In the event of the loss of business from existing OEM customers, we may be unable to secure new customers for our existing products without first achieving new design wins. Consequently, when the quantities of inventory on hand exceed forecasted demand from existing OEM customers into whose products our products have been designed, we generally will be unable to sell our excess inventories to others, and the net realizable value of such inventories is generally estimated to be zero. The amount of the write-down is the excess of historical cost over estimated realizable value (generally zero). Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those projected by management. In the event that actual demand is lower than originally projected, additional inventory write-downs may be required.
Impairment
Valuation of long-lived assets -- Long-lived assets, including fixed assets, goodwill and intangible assets are continually monitored — Carrying values for long-lived assets and definitive-lived intangible assets, excluding 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,” which was adopted on October 1, 2002. Impairment reviews are conducted at the judgment of management whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other
14
Skyworks Solutions, Inc. and Subsidiaries things, certain assumptions about expected future operating performance. Our estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to our business model or changes in our operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined using discounted cash flows.
Carrying values of goodwill and other intangible assets with indefinite lives are reviewed annually for possible impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” which was adopted on October 1, 2002. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares our fair value to our net book value. In determining fair value, SFAS No. 142 allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. Step two of the analysis compares the implied fair value of goodwill to its carrying amount in a manner similar to purchase price allocation. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. We test our goodwill for impairment annually as of the first day of our fourth fiscal quarter and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired.
Deferred income taxes -- — We have provided a valuation allowance related to our substantial United States deferred tax assets. If sufficient evidence of our ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, we may be required to reduce our valuation allowance, which may result in income tax benefits in our statement of operations. ReductionThe future realization of a portion of the valuation allowance maycertain tax deferred assets will be applied to reduce the carrying value of goodwill. The portion of the valuation allowance for these deferred tax assets for which subsequently recognized tax benefits may be applied to reduce goodwill related to the purchase consideration of the Merger is approximately $24$44 million. We evaluate the realizability of the deferred tax assets and assess the need for a valuation allowance quarterly. In fiscal 2002, the Companywe recorded a tax benefit of approximately $23 million related to the impairment of our Mexicali assets. A valuation allowance has not been established because the Company believeswe believe that the related deferred tax asset will be recovered during the carry forwardcarryforward period.
Warranties -- Reserves for estimated product warranty costs are provided at the
time revenue is recognized. Although we engage in extensive product quality
programs and processes, our warranty obligation is affected by product failure
rates and costs incurred to rework or replace defective products. Should actual
product failure rates or costs differ from estimates, additional warranty
reserves could be required, which could reduce our gross margins.
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.
RESULTS OF OPERATIONS
GENERAL
In fiscal 2002, our revenues
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 recognition is deferred in all instances where the earnings process is incomplete. Certain product sales are made to third partieselectronic component distributors under agreements allowing for price protection and/or a right of return on unsold products. We reduce revenue to the extent of our estimate for distributor claims of price protection and/or right of return on unsold product. A reserve for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating a reserve.
RESULTS OF OPERATIONS
GENERAL
Net revenues increased approximately 94% from$160.0 million, or 35%, in fiscal 2001,2003 when compared to fiscal 2002 primarily as athe result of renewedincreasing demand for our wireless product portfolio. The increased demand is partially dueportfolio and the exclusion of Alpha’s revenues for periods prior to reductionthe Merger. Since the Merger, we have also expanded our customer base and geographical market presence resulting in the level of excess channel inventories that had adversely affected the
digital cellular handset markets during fiscal 2001. Revenues attributable to
Alpha, post Merger, includedhigher revenues in fiscal 2003. Gross margin improved in fiscal 2003 when compared to fiscal 2002 were approximately $36 million.
During 2002 the Company consolidated facilities, reduced its work force and
continued to implement cost saving initiatives. In addition,reflecting increased revenues and improved utilization of our manufacturing facilities contributedfacilities. In fiscal 2003, we recorded special charges of $34.5 million, principally related to the impairment of assets related to our infrastructure products and certain restructuring charges.
We adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” October 1, 2002 and performed a transitional impairment test for goodwill. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares our fair value to our net book value. In determining fair value, SFAS No. 142 allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. As part of the first step, we determined that we have one reporting unit for purposes of performing the fair-value based test of goodwill. This reporting unit is consistent with our single operating segment, which management determined is appropriate under the provisions of SFAS No. 131, “Disclosures about Segments of an improvementEnterprise and Related Information.” We completed step one and determined that our goodwill and unamortized intangible assets were impaired. Step two of the analysis compares the implied fair value of goodwill to its carrying amount in operating resultsa manner similar to purchase price allocation. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. We completed step two and determined that the carrying amount of our goodwill was $397.1 million greater than its implied fair value. This transitional impairment charge was recorded as a cumulative effect of a change in accounting principle in fiscal 2003. In addition, we completed our annual goodwill impairment test for fiscal 2003 and determined that as of July 1, 2003, our goodwill was not further impaired.
YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
The following table sets forth the results of our operations expressed as a percentage of net revenues for the fiscal years below:
| 2003 | 2002 | 2001 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net revenues | 100 | .0% | 100 | .0% | 100 | .0% | |||||
| Cost of goods sold | 61 | .6 | 72 | .4 | 119 | .6 | |||||
| Gross margin | 38 | .4 | 27 | .6 | (19 | .6) | |||||
| Operating expenses: | |||||||||||
| Research and development | 24 | .6 | 29 | .0 | 42 | .6 | |||||
| Selling, general and administrative | 13 | .0 | 11 | .0 | 19 | .7 | |||||
| Amortization of intangible assets | 0 | .7 | 2 | .8 | 5 | .9 | |||||
| Purchased in-process research and development | - | - | 14 | .3 | - | - | |||||
| Special charges | 5 | .6 | 25 | .4 | 34 | .1 | |||||
| Total operating expenses | 43 | .8 | 82 | .5 | 102 | .3 | |||||
| Operating loss | (5 | .4) | (54 | .9) | (121 | .9) | |||||
| Interest expense | (3 | .5) | (0 | .9) | - | - | |||||
| Other income (expense), net | 0 | .2 | - | - | 0 | .1 | |||||
| Loss before income taxes and cumulative effect of change in accounting principle | (8 | .7) | (55 | .8) | (121 | .8) | |||||
| Provision (benefit) for income taxes before cumulative effect of | |||||||||||
| change in accounting principle | 0 | .1 | (4 | .3) | 0 | .7 | |||||
| Loss before cumulative effect of change in accounting principle | (8 | .8) | (51 | .6) | (122 | .5) | |||||
| Cumulative effect of change in accounting principle, net of tax | (64 | .3) | - | - | - | - | |||||
| Net loss | (73 | .1)% | (51 | .6)% | (122 | .5)% | |||||
NET REVENUES
| Years Ended September 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | Change | 2002 | Change | 2001 | |||||||||||||
| (in thousands) | |||||||||||||||||
| Net revenues | $ | 617,789 | 35 | .0% | $ | 457,769 | 75 | .8% | $ | 260,451 | |||||||
We market and sell our semiconductor products and system solutions to leading OEMs of communication electronics products, third-party original design manufacturers (“ODMs”) and contract manufacturers and indirectly through electronic components distributors. Samsung Electronics Co. accounted for 15%, 35%, and 44% of net revenues for the fiscal years 2003, 2002 and 2001, respectively. Motorola, Inc. accounted for 11% of net revenues for the fiscal years 2003 and 2002, and represented less than 10% of net revenues for fiscal 2001. Conexant accounted for less than 10% of net revenues for the fiscal years 2003 and 2002 and represented 17% of net revenues for fiscal 2001. Nokia Corporation accounted for less than 10% of net revenues for the fiscal years 2003 and 2002 and represented 12% of net revenues for fiscal 2001.
Revenues derived from customers located in the Americas region accounted for 25%, 17% and 27% of net revenues for the fiscal years 2003, 2002 and 2001, respectively. Revenues derived from customers located in the Asia-Pacific region were 61%, 77% and 64% of net revenues for the fiscal years 2003, 2002 and 2001, respectively. Revenues derived from customers located in the Europe/Middle East/Africa region were 14%, 6% and 9% of net revenues for the fiscal years 2003, 2002 and 2001, respectively. Our revenues by geography do not necessarily correlate to end handset demand by region. For example, if we sell a power amplifier module to a customer in South Korea, we record the sale 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.
The foregoing percentages are based on sales representing Washington/Mexicali sales for fiscal 2001 and fiscal 2002 up to the time of the Merger, and sales of the combined company for the post-Merger period from June 26, 2002 through the end of the fiscal year and for fiscal 2003.
Net revenues increased in fiscal 2003 when compared to fiscal 2002 primarily reflecting increasing demand for our wireless product portfolio and the exclusion of Alpha’s revenues for periods prior to the Merger. More specifically, GSM direct conversion transceivers and complete cellular systems as well as CDMA RF subsystems exhibited strong year-over-year growth. Additionally, we have launched a number of more highly integrated product offerings, added to our customer base and expanded our geographical market presence.
These increases in net revenues in fiscal 2003 when compared to fiscal 2002 were tempered by a decrease in average selling prices of our front-end module products and an industry-wide component and handset inventory correction. In addition, lower CDMA handset subsidies in Korea also adversely affected net revenues in fiscal 2003 when compared to fiscal 2002. In certain global markets, wireless operators provide subsidies on handset sales to their customers, ultimately decreasing the cost of the handset to the customer.
Net revenues increased 75.8% in fiscal 2002, when compared to fiscal 2001, principally reflecting increased sales of GSM products, including power amplifier modules and complete cellular systems. We also experienced increased demand for our power amplifier modules for CDMA and TDMA applications from a number of our key customers.
GROSS MARGIN
| Years Ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||||||
| (in thousands) | |||||||||||
| Gross margin | $ | 237,324 | $ | 126,161 | (51,052 | ) | |||||
| % of net revenues | 38.4 | % | 27.6 | % | (19.6 | )% | |||||
Gross margin represents net revenues less cost of goods sold. Cost of goods sold consists primarily of purchased materials, labor and overhead (including depreciation) associated with product manufacturing, royalty and other intellectual property costs and sustaining engineering expenses pertaining to products sold. Cost of goods sold for the periods prior to the Merger also includes allocations from Conexant of manufacturing cost variances, process engineering and other manufacturing costs, which are not included in our unit costs but are expensed as incurred.
The improvement in gross margin in fiscal 2003 compared to fiscal 2002 reflects increased revenues, improved utilization of our manufacturing facilities and a decrease in depreciation expense that resulted from the write-down of our Mexicali facility assets in the third quarter of fiscal 2002. Although recent revenue growth has increased the level of utilization of our manufacturing facilities, these facilities continue to operate below optimal capacity and underutilization continues to adversely affect our unit cost of goods sold and gross margin.
Gross margin in fiscal 2003 was also favorably affected by $4.8 million when we reevaluated our obligation under a wafer fabrication supply agreement with Conexant and Jazz Semiconductor and reduced our liability and cost of sales in the first quarter of fiscal 2003. Pursuant to the terms of wafer supply agreements with Conexant and Jazz Semiconductor, we are committed to obtain certain minimum wafer volumes from Jazz Semiconductor. As of September 30, 2003, we expect to meet all of these purchase obligations. Our costs will be affected by the extent of our use of outside foundries and the pricing we are able to obtain. During periods of high industry demand for wafer fabrication capacity, we may have to pay higher prices to secure wafer fabrication capacity.
The improvement in gross margin in fiscal 2002, compared to fiscal 2001, reflects increased revenues, improved utilization of our manufacturing facilities and a decrease in depreciation expense that resulted from the write-down of the Newbury Park wafer fabrication assets in the third quarter of fiscal 2001 and the Mexicali facility assets in the third quarter of 2002. The effect of the write-down of the Newbury Park wafer fabrication assets and the Mexicali facility assets on fiscal 2002 gross margin was approximately $10.5 million and $5.5 million, respectively. Gross margin for fiscal 2002 was adversely affectedimpacted by additional warranty costs of $14.0 million. The additional warranty costs were the result of an agreement with a chargemajor customer for the reimbursement of $5.1 millioncosts the customer incurred in connection with the failure of a product when used in a certain adverse environment. Although we developed and sold the product to the customer pursuant to mutually agreed-upon specifications, the product experienced unusual failures when used in an environment in which the product had not been previously tested. The product has since been modified and no significant additional costs are expected losses for certainto be incurred in connection with this issue.
In addition, we originally estimated our obligation under our wafer fabrication commitments made under a supply agreement with Conexant whereby we are initially obligated to obtain certain
minimum volume levels fromand Jazz Semiconductor, Inc. Costwould result in excess costs of goods sold forapproximately $12.9 million when recorded as a liability and charged to cost of sales in the third quarter of fiscal 2002. During the fourth quarter of fiscal 2002, also reflectswe reevaluated this obligation and reduced our liability and cost of sales by approximately $3.1$8.1 million in the quarter.
Gross margin for the year ended September 30, 2002 benefited by approximately $12.5 million as a result of additional costs relatedthe sale of inventories having a historical cost of $12.5 million that were written down to a zero cost basis during fiscal year 2001; such sales resulted from sharply increased demand beginning in the Merger.
15
Skyworks Solutions, Inc. and Subsidiaries
Duringfourth quarter of fiscal 2001 we -- like many of our customers and competitors -- were
adversely impacted by a broad slowdown affectingthat was not anticipated at the wireless communications
sector, including mosttime of the end-markets for our products. Our net revenues for
fiscal 2001 reflected deterioration in the digital cellular handset market
resulting from excess channel inventories due to a slowdown in demand for mobile
phones and a slower transition to next-generation phones. The effect of weakened
end-customer demand was compounded by higher than normal levels of component
inventories among manufacturer, subcontractor and distributor customers. The
overall slowdown in the wireless communications markets also affected our gross
margins and operating income. Cost of goods soldwrite-downs. Gross margin for fiscal 2001 was adversely affected by the significant underutilizationinventory write-downs of manufacturing capacity. Costapproximately $58.7 million, partially offset by approximately $4.5 million of goods sold forsubsequent sales of inventories written down to a zero cost basis. The inventories that were written down to a zero cost basis in fiscal 2001 also reflects $58.7were either sold or scrapped during fiscal 2003, 2002 and 2001. During fiscal 2003, 2002 and 2001, we sold $2.7 million, $12.5 million and $4.5 million, respectively, and scrapped $2.7 million, $1.8 million and $34.5 million, respectively. As of September 30, 2003, we no longer held inventories which were written down to a zero cost basis in fiscal 2001.
The inventory write-downs across our product portfolio resultingrecorded in fiscal 2001 resulted from the sharply reduced end-customer demand we experienced, primarily associated with our RF components, as a result of the rapidly changing demand environment for digital cellular handsets.
EXPENSE REDUCTIONhandsets during that period. As a result of these market conditions, we experienced a significant number of order cancellations and a decline in the volume of new orders, beginning in the fiscal 2001 first quarter and becoming more pronounced in the second quarter.
RESEARCH AND RESTRUCTURING INITIATIVES
DuringDEVELOPMENT
| Years Ended September 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | Change | 2002 | Change | 2001 | |||||||||||||
| (in thousands) | |||||||||||||||||
| Research and development | $ | 151,762 | 14 | .4% | $ | 132,603 | 19 | .4% | $ | 111,053 | |||||||
| % of net revenues | 24.6% | 29.0% | 42.6% | ||||||||||||||
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. Research and development expenses for the periods prior to the Merger also include allocated costs for shared research and development services provided by Conexant, principally in the areas of advanced semiconductor process development, design automation and advanced package development, for the benefit of several of Conexant’s businesses.
The increase in research and development expenses in fiscal 2003 compared to fiscal 2002 represents our commitment to design new products and processes and address new opportunities to meet our customers’ demands. We have expanded customer support engagements as well as development efforts targeting semiconductor solutions using the Company reduced its workforce through involuntary
severance programsCDMA2000, GSM, General Packet Radio Services, or GPRS, and recorded restructuring charges of approximately $3.0
million for coststhird-generation, or 3G, wireless standards in both the digital cellular handset and infrastructure markets. The increase in research and development expenses in fiscal 2003 when compared to the previous year is also related to the workforce reductionour research and the consolidation of
certain facilities. The charges were based upon estimatesdevelopment expenses representing those of the costcombined company after the Merger whereas those expenses in 2002 are representative of severance benefits for affected employeesonly Washington/Mexicali prior to June 25, 2002.
The increase in research and lease cancellation, facility
sales,development expenses in fiscal 2002 compared to fiscal 2001 primarily reflects the opening of a new design center in Le Mans, France and other costs relatedhigher headcount and personnel-related costs. Subsequent to the consolidationfirst quarter of facilities. Substantially
all amounts accrued for these actions are expected to be paid within one year.
In fiscal 2001, we implementedexpanded customer support engagements as well as development efforts targeting semiconductor solutions using the CDMA2000, GSM, GPRS, and 3G wireless standards in both the digital cellular handset and infrastructure markets.
SELLING, GENERAL AND ADMINISTRATIVE
| Years Ended September 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | Change | 2002 | Change | 2001 | |||||||||||||
| (in thousands) | |||||||||||||||||
| Selling, general and administrative | $ | 80,222 | 60 | .0% | $ | 50,178 | (2 | .1)% | $ | 51,267 | |||||||
| % of net revenues | 13.0% | 11.0% | 19.7% | ||||||||||||||
Selling, general and administrative expenses include personnel costs (legal, accounting, treasury, human resources, information systems, customer service, etc.), sales representative commissions, advertising and other marketing costs. Selling, general and administrative expenses also include allocated general and administrative expenses from Conexant for the periods prior to the Merger for a numbervariety of these shared functions.
The increase in selling, general and administrative expenses in fiscal 2003 when compared to fiscal 2002 is primarily related to our selling, general and administrative expenses representing those of the combined company after the Merger whereas those expenses for the same period in 2002 are representative of only Washington/Mexicali prior to June 25, 2002.
The decrease in selling, general and administrative expenses in fiscal 2002 compared to fiscal 2001 primarily reflects lower headcount and personnel-related costs resulting from the expense reduction and restructuring initiativesactions initiated during fiscal 2001 and lower provisions for uncollectible accounts receivable.
AMORTIZATION OF INTANGIBLE ASSETS
| Years Ended September 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | Change | 2002 | Change | 2001 | |||||||||||||
| (in thousands) | |||||||||||||||||
| Amortization of intangible assets | $ | 4,386 | (66 | .1)% | $ | 12,929 | (15 | .3)% | $ | 15,267 | |||||||
| % of net revenues | 0.7% | 2.8% | 5.9% | ||||||||||||||
In 2002, we recorded $36.4 million of intangible assets related to more closely align our cost structurethe Merger consisting of developed technology, customer relationships and a trademark. These assets are principally being amortized on a straight-line basis over a 10-year period. Amortization expense for fiscal 2003 primarily represents the amortization of these intangible assets. Amortization expense for fiscal 2002 and 2001 primarily represents amortization of goodwill and intangible assets acquired in connection with the then-current
business environment. The cost reduction initiatives included workforce
reductions, temporary shutdownsWashington/Mexicali’s acquisition of manufacturing facilities and significant
reductions in capital spending.
Through involuntary severance programs and attrition, we reduced our workforcePhilsar Semiconductor, Inc. (“Philsar”) in fiscal 2000. Philsar was a developer of RF semiconductor solutions for personal wireless connectivity, including emerging standards such as Bluetooth, and RF components for third-generation digital cellular handsets. We wrote off all goodwill and other intangible assets associated with our acquisition of the Philsar Bluetooth business in the third quarter of fiscal 2002. The lower amortization expense in fiscal 2003 when compared to fiscal 2002 and fiscal 2001, by approximately 250 employees (principallyprimarily resulted from the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” on October 1, 2002. Had the Company ceased amortizing goodwill on October 1, 2000, amortization expense would have been $10.7 million and $13.9 million less in fiscal 2002 and fiscal 2001, respectively.
We adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” on October 1, 2002 and performed a transitional impairment test for goodwill. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares our manufacturing
operations).fair value to our net book value. In determining fair value, SFAS No. 142 allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. As part of the first step, we determined that we have one reporting unit for purposes of performing the fair-value based test of goodwill. This reporting unit is consistent with our single operating segment, which management determined is appropriate under the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” We completed step one and determined that our goodwill and unamortized intangible assets were impaired. Step two of the analysis compares the implied fair value of goodwill to its carrying amount in a manner similar to purchase price allocation. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. We completed step two and determined that the carrying amount of our goodwill was $397.1 million greater than its implied fair value. This transitional impairment charge was recorded as a cumulative effect of a change in accounting principle in fiscal 2003. In addition, we periodically idledcompleted our Newbury Park, California
wafer fabrication facilityannual goodwill impairment test for fiscal 2003 and determined that as of July 1, 2003, our goodwill was not further impaired.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
| Years Ended September 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | Change | 2002 | Change | 2001 | |||||||||||||
| (in thousands) | |||||||||||||||||
| Purchased in-process research and development | $ | -- | N/A | $ | 65,500 | N/A | $ | -- | |||||||||
In connection with the Merger in fiscal 2002, $65.5 million was allocated to purchased in-process research and development (“IPR&D”) and expensed immediately upon completion of the acquisition (as a charge not deductible for atax purposes) because the technological feasibility of certain products under development had not been established and no future alternative uses existed. The charges represent the estimated fair values of the portion of fiscal 2001, implementedIPR&D projects that had been completed by Alpha at the time of the Merger.
Prior to the Merger, Alpha was in the process of developing new technologies in its semiconductor and ceramics segments. The objective of the IPR&D effort was to develop new semiconductor processes, ceramic materials and related products to satisfy customer requirements in the wireless and broadband markets.
The semiconductor segment was involved in several projects that have been aggregated into the following categories based on the respective technologies:
Power Amplifier: Power amplifiers are designed and manufactured for use in different types of wireless handsets. The main performance attributes of these amplifiers are efficiency, power output, operating voltage and distortion. Current research and development is focused on expanding the offering to all types of wireless standards, improving performance by process and circuit improvements and offering a reduced workweek athigher level of integration.
Control Products: Control products consist of switches and switch filters that are used in wireless applications for signal routing. Most applications are in the handset market enabling multi-mode, multi-band handsets. Current research and development is focused on performance improvement and cost reduction by reducing chip size and increasing functionality.
Broadband: The products in this grouping consist of radio frequency (RF) and millimeter wave semiconductors and components designed and manufactured specifically to address the needs of high-speed, wireline and wireless network access. Current and long-term research and development is focused on performance enhancement of speed and bandwidth as well as cost reduction and integration.
Silicon Diode: These products use silicon processes to fabricate diodes for use in a variety of RF and wireless applications. Current research and development is focused on reducing the size of the device, improving performance and reducing cost.
Ceramics: The ceramics segment was involved in projects that relate to the design and manufacture of ceramic-based components such as resonators and filters for the wireless infrastructure market. Current research and development is focused on performance enhancements through improved formulations and electronic designs.
The material risks associated with the successful completion of the in-process technology were associated with our Mexicali facility.ability to successfully finish the creation of viable prototypes and successful design of the chips, masks and manufacturing processes required. We recorded restructuring chargesexpected to benefit from the in-process projects as the individual products that contained the in-process technology were put into production and sold to end-users. The release dates for each of $2.7 millionthe products within the product families were varied. The fair value of the IPR&D was determined using the income approach. Under the income approach, the fair value reflected the present value of the projected cash flows that were expected to be generated by the products incorporating the IPR&D, if successful. The projected cash flows were discounted to approximate fair value. The discount rate applicable to the cash flows of each project reflected the stage of completion and other risks inherent in each project. The weighted average discount rate used in the valuation of IPR&D was 30 percent. As of September 30, 2003, the Company had either completed or abandoned each of these projects. The completed IPR&D projects commenced generating cash flows in fiscal 2001 related2003. Due to the workforce reductions completed through September 30, 2001. The restructuring
initiativesnature of these projects and other expense reduction actions resulted in a quarterly
reduction of operating expenses of approximately $4.8 million forthe related technolgy, the revenue streams derived from these projects cannot be separately identified.
SPECIAL CHARGES
| Years Ended September 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | Change | 2002 | Change | 2001 | |||||||||||||
| (in thousands) | |||||||||||||||||
| Special charges | $ 34,493 | (70.3)% | $ | 116,321 | (30. | 9)% | $ | 88,876 | |||||||||
ASSET IMPAIRMENTS
During the fourth quarter of fiscal 2001 as compared2003, we recorded a $26.0 million charge for the impairment of assets related to certain infrastructure products manufactured in our Woburn, Massachusetts and Adamstown, Maryland facilities. The Woburn facility primarily manufactures semiconductor products based on both silicon wafer technology and gallium arsenide technology. Our Adamstown, Maryland facility primarily manufactures ceramics components. We experienced a significant decline in factory utilization resulting from a downturn in the market for products manufactured at these two facilities and a decision to discontinue certain products. The impairment charge was based on a recoverability analysis prepared by management based on these factors and the related impact on our current and projected outlook. We projected lower revenues and new order volume for these products and management believed these factors indicated that the carrying value of the related assets (machinery, equipment and intangible assets) may have been impaired and that an impairment analysis should be performed. In performing the analysis for recoverability, management estimated the future cash flows expected to result from these products over a five-year period. Since the estimated undiscounted cash flows were less than the carrying value of the related assets, it was concluded that an impairment loss should be recognized. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the impairment charge was determined by comparing the estimated fair value of the related assets to their carrying value. The fair value of the assets was determined by computing the present value of the estimated future cash flows using a discount rate of 16%, which management believed was commensurate with the secondunderlying risks associated with the projected future cash flows. Management believes the assumptions used in the discounted cash flow model represented a reasonable estimate of the fair value of the assets. The write down established a new cost basis for the impaired assets. The anticipated pre-tax cost savings related to these impairment charges is expected to be $17.4 million over the next five years (fiscal 2004 through fiscal 2008) and $8.6 million over the subsequent fifteen years (fiscal 2009 through 2023).
In addition, during the fourth quarter of fiscal 2001.
ASSET IMPAIRMENTS
During2003 we recorded a $2.3 million charge for the third quarterimpairment of our Haverhill, Massachusetts property that is currently being held for sale. In fiscal 2003, we relocated our operations from this facility to our Woburn, Massachusetts facility. We are actively marketing the property located in Haverhill, Massachusetts.
During fiscal 2002, the Company recorded a $66.0 million charge for the impairment of the assembly and test machinery and equipment and related facility in Mexicali, Mexico. The impairment charge was based on a recoverability analysis prepared by management as a result of a significant downturn in the market for test and assembly services for non-wireless products and the related impact on our current and projected outlook.
The Company
We experienced a severe decline in factory utilization at itsour Mexicali facility for non-wireless products and projected decreasing revenues and new order volume. Management believed these factors indicated that the carrying value of the assembly and test machinery and equipment and related facility may have been impaired and that an impairment analysis should be performed. In performing the analysis for recoverability, management estimated the future cash flows expected to result from the manufacturing activities at the Mexicali facility over a ten-year period. The estimated future cash flows were based on a gradual phase-out of services sold to Conexant and modest volume increases consistent with management'smanagement’s view of the outlook for the business, partially offset by declining average selling prices. The declines in average selling prices were consistent with historical trends and management'smanagement’s decision to reduce capital expenditures for future capacity expansion. Since the estimated undiscounted cash flows were less than the carrying value (approximately $100 million based on historical cost) of the related assets, it was concluded that an impairment loss should be recognized. The impairment charge was determined by comparing the estimated fair value of the related assets to their carrying value. The fair value of the assets was determined by computing the present value of the estimated future cash flows using a discount rate of 24%, which management believed was commensurate with the underlying risks associated with the projected future cash flows. We believeManagement believes the assumptions used in the discounted cash flow model represented a reasonable estimate of the fair value of the assets. The write down established a new cost basis for the impaired assets.
During the third quarter of fiscal 2002, the Companywe recorded a $45.8 million charge for the write-off of goodwill and other intangible assets associated with our May 2000 acquisition of Philsar Semiconductor Inc. ("Philsar"). Philsar was
a developer
16
Skyworks Solutions, Inc. and Subsidiaries
of radio frequency semiconductor solutions for personal wireless connectivity,
including emerging standards such as Bluetooth, and radio frequency components
for third-generation (3G) digital cellular handsets.in fiscal 2000. Management determined that the Companywe would not support the technology associated with the Philsar Bluetooth business. Accordingly, this product line has beenwas discontinued and the employees associated with the product line havewere either been severed or relocated to other operations. As a result of the actions taken, management determined that the remaining goodwill and other intangible assets associated with the Philsar acquisition had beenwere impaired.
Goodwill and intangible assets resulting from the Merger will be tested for
impairment following the guidelines established in SFAS 142,which addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. We will adopt SFAS 142 in the beginning of our 2003 fiscal year, and are
required to perform a transitional impairment test for goodwill upon adoption.
We may be required to record a substantial transitional impairment charge as a
result of adopting SFAS 142. The carrying value of goodwill and intangible
assets, subject to the transitional impairment test, is approximately $907.5
million at September 30, 2002.
During the third quarter of fiscal 2001 the Companywe recorded an $86.2 million charge for the impairment of theour manufacturing facility and related wafer fabrication machinery and equipment at the Company'sour Newbury Park, California facility. This impairment charge was based on a recoverability analysis prepared by management as a result of the dramatic downturn in the market for wireless communications products and the related impact on theour then-current and projected business outlook of the Company.outlook. Through the third quarter of fiscal 2001, the
Companywe experienced a severe decline in factory utilization at the Newbury Park wafer fabrication facility and decreasing revenues, backlog, and new order volume. Management believed these factors, together with its decision to significantly reduce future capital expenditures for advanced process technologies and capacity beyond the then-current levels, indicated that the value of the Newbury Park facility may have been impaired and that an impairment analysis should be performed. In performing the analysis for recoverability, management estimated the future cash flows expected to result from the manufacturing activities at the Newbury Park facility over a ten-year period. The estimated future cash flows were based on modest volume increases consistent with management'smanagement’s view of the outlook for the industry, partially offset by declining average selling prices. The declines in average selling prices were consistent with historical trends and management'smanagement’s decision to focus on existing products based on the current technology. Since the estimated undiscounted cash flows were less than the carrying value (approximately $106 million based on historical cost) of the related assets, it was concluded that an impairment loss should be recognized. The impairment charge was determined by comparing the estimated fair value of the related assets to their carrying value. The fair value of the assets was determined by computing the present value of the estimated future cash flows using a discount rate of 30%, which management believed was commensurate with the underlying risks associated with the projected cash flows. The Company believesWe believe the assumptions used in the discounted cash flow model represented a reasonable estimate of the fair value of the assets. The write-down established a new cost basis for the impaired assets.
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
The following table sets forth
RESTRUCTURING CHARGES
During the results of our operations expressed as a
percentage of net revenues for the fiscal years below:
During fiscal 2002, we implemented a number of cost reduction initiatives to more closely align our cost structure with the then-current business environment. We recorded restructuring charges of approximately $3.0 million for costs related to the workforce reduction and the consolidation of certain facilities. Substantially all amounts accrued for these actions have been paid.
During fiscal 2001, Washington/Mexicali reduced its workforce by approximately 250 employees, including approximately 230 employees in manufacturing operations. Restructuring charges of $2.7 million were recorded for such actions and were based upon estimates of the cost of severance benefits for the affected employees. SubstantiallyWe have paid all amounts accrued for these actions are expected to
be paid within one year.
actions.
Activity and liability balances related to the fiscal 20012002 and fiscal 20022003 restructuring actions are as follows (in thousands):
| Fiscal 2002 Workforce Reductions | Fiscal 2002 Facility Closings and Other | Fiscal 2003 Workforce Reductions | Fiscal 2003 Facility Closings and Other | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Charged to costs and expenses | $ | 2,923 | $ | 97 | $ | -- | $ | -- | $ | 3,020 | |||||||
| Cash payments | (2,225 | ) | (13 | ) | -- | -- | (2,238 | ) | |||||||||
| Restructuring balance, September 30, 2002 | 698 | 84 | -- | -- | 782 | ||||||||||||
| Charged to costs and expenses | -- | -- | 4,819 | 1,405 | 6,224 | ||||||||||||
| Cash payments | (698 | ) | (47 | ) | (3,510 | ) | (1,236 | ) | (5,491 | ) | |||||||
| Restructuring balance, September 30, 2003 | $ | -- | $ | 37 | $ | 1,309 | $ | 169 | $ | 1,515 | |||||||
In addition, the Companywe assumed approximately $7.8 million of restructuring reserves from Alpha in connection with the Merger. During the fiscal years ended September 30, 2003 and 2002, payments related to the restructuring reserves assumed from Alpha were $4.7 million and $1.1 million, respectively. On September 27, 200230, 2003, this balance was $6.7$2.0 and primarily relates to payments on a lease that expires in 2008.
INTEREST EXPENSE
| Years Ended September 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | Change | 2002 | Change | 2001 | |||||||||||||
| (in thousands) | |||||||||||||||||
| Interest expense | $ 21,403 | 406.3% | $ | 4,227 | N/A | $ | -- | ||||||||||
Our debt at September 30, 2003 consists of $230 million of convertible subordinated Junior notes, $45 million of convertible senior subordinated notes, $41.7 million of borrowings under our receivable purchase agreement and substantially all amounts accrued are expecteda loan that matures in December 2003.
Our long-term debt primarily consists of $230 million of convertible subordinated Junior notes at a fixed interest rate of 4.75 percent due 2007. These Junior notes can be converted into 110.4911 shares of common stock per $1,000 principal balance, which is the equivalent of a conversion price of approximately $9.05 per share. We may redeem the Junior notes at any time after November 20, 2005. The redemption price of the Junior notes during the period between November 20, 2005 through November 14, 2006 will be $1,011.875 per $1,000 principal amount of notes to be paid within oneredeemed, plus accrued and unpaid interest, if any, to the redemption date, and the redemption price of the notes beginning on November 15, 2006 and thereafter will be $1,000 per $1,000 principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date. Holders may require that we repurchase the Junior notes upon a change in control of the Company. We pay interest in cash semi-annually in arrears on May 15 and November 15 of each year.
In addition, our long-term debt includes $45 million of convertible senior subordinated notes at a fixed rate of 15 percent due June 30, 2005, which were issued as part of our debt refinancing with Conexant completed on November 13, 2002. These Senior notes can be converted into our common stock at a conversion rate based on the applicable conversion price, which is subject to adjustment based on, among other things, the market price of our common stock. Based on this adjustable conversion price, we expect that the maximum number of shares that could be issued under the Senior notes is approximately 7.1 million shares, subject to adjustment for stock splits and other similar dilutive occurrences. If the holder(s) of these Senior notes converted the notes at a price that is less than the original conversion price ($7.87) as the result of a decrease in the market price of our stock, we would be required to record a charge to interest expense in the period of conversion. At maturity (including upon certain acceleration events), we will pay the principal amount of the Senior notes by issuing a number of shares of common stock equal to the principal amount of the Senior notes then due and payable divided by the applicable conversion price in effect on such date, together with cash in lieu of any fractional shares. We may redeem the Senior notes at any time after May 12, 2004 at $1,030 per $1,000 principal amount of Senior notes to be redeemed, plus accrued and unpaid interest. The holder(s) may require that we repurchase the Senior notes upon a change in control of the Company. We pay interest in cash on the Senior notes on the last business day of each March, June, September and December of each year. Interest on the Senior notes is not deductible for tax purposes because of the conversion feature.
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, National Association providing for a $50 million credit facility (“Facility Agreement”) secured by the purchased accounts receivable. Our short-term debt consists primarily of funds borrowed under the Facility Agreement. 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 our results of operations. Interest related to the Facility Agreement is LIBOR plus 0.4% and was approximately 1.5% at September 30, 2003. We perform collections and administrative functions on behalf of Skyworks USA. As of September 30, 2003, Skyworks USA had borrowed $41.7 million under this agreement.
In addition, our short-term debt includes the remaining portion of a ten-year $960,000 loan from the State of Maryland under the Community Development Block Grant program due December 2003 at an interest rate of 5 percent.
OTHER INCOME (EXPENSE), NET
| Years Ended September 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | Change | 2002 | Change | 2001 | |||||||||||||
| (in thousands) | |||||||||||||||||
| Other income (expense), net | $ 1,317 | nm | $ | (56) | (126 | .7)% | $ | 210 | |||||||||
nm = not meaningful
Other income (expense), net is comprised primarily of interest expense, interest
income on invested cash balances, gains/losses on the sale of assets, foreign exchange gains/losses and other non-operating income and expense items. The
decrease to $4.3 million of other expense, net in fiscal 2002 from $0.2 million
of other income, net in fiscal 2001 is principally the result of
22
Skyworks Solutions, Inc. and Subsidiaries
approximately $4.1 million of additional interest expense related to the
short-term note to Conexant for the Mexicali facility purchase.
PROVISION FOR INCOME TAXES
The net operating loss carryforwards and other tax benefits relating to the
historical operations of Washington/Mexicali were retained by Conexant in the
spin-off transaction, and will not be available to be utilized in our future
separate tax returns.
| Years Ended September 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | Change | 2002 | Change | 2001 | |||||||||||||
| (in thousands) | |||||||||||||||||
| Provision (benefit) for income taxes | $ 652 | nm | $ | (19,589) | nm | $ | 1,619 | ||||||||||
As a result of our history of operating losses and the expectation of future operating results, we determined that it is more likely than not that historic and current year income tax benefits will not be realized except for certain future deductions associated with Mexicali in the
post-spin-off period.our foreign operations. Consequently, no United States income tax benefit has been recognized relating to the U.S. operating losses. As of September 30, 2002,2003, we have established a valuation allowance against all of our net U.S. deferred tax assets. Deferred tax assets have been recognized for foreign operations when management believes they will be recovered during the carry forward period.
The provision (benefit) for income taxes for fiscal 2003, 2002 2001 and 20002001 consists of foreign income taxes incurred by foreign operations. We do not expect to recognize any income tax benefits relating to future operating losses generated in the United States until management determines that such benefits are more likely than not to be realized. In 2002, the Company recordedprovision for foreign income taxes was offset by a tax benefit of approximately $23 million related to the impairment of our Mexicali assets.
No provision has been made for United States, state, or additional foreign income taxes related to approximately $3.8 million of undistributed earnings of foreign subsidiaries which have been or are intended to be permanently reinvested. It is not practical to determine the United States federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on October 1, 2002, and performed a transitional impairment test for goodwill. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares our fair value to our net book value. In determining fair value, SFAS No. 142 allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. As part of the first step, we determined that we have one reporting unit for purposes of performing the fair-value based test of goodwill. This reporting unit is consistent with our single operating segment, which management determined is appropriate under the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." We completed step one and determined that our goodwill and unamortized intangible assets were impaired. Step two of the analysis compares the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. We completed step two and determined that the carrying amount of our goodwill was $397.1 million greater than its implied fair value. This transitional impairment charge was recorded as a cumulative effect of a change in accounting principle in fiscal 2003. In addition, we completed our annual goodwill impairment test for fiscal 2003 and determined that as of July 1, 2003, our goodwill was not further impaired.
LIQUIDITY AND CAPITAL RESOURCES
| (in thousands) | Years Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||||
| Cash and cash equivalents at beginning of period | $ 53,358 | $ 1,998 | $ 4,179 | ||||||
| Net cash provided by (used in) operating activities | (72,052 | ) | (99,094 | ) | (89,406 | ) | |||
| Net cash provided by (used in) investing activities | (44,282 | ) | 70,042 | (51,118 | ) | ||||
| Net cash provided by (used in) financing activities | 224,482 | 80,412 | 138,343 | ||||||
| Cash and cash equivalents at end of period | $ 161,506 | $ 53,358 | $ 1,998 | ||||||
Cash and cash equivalents at September 30, 2003, 2002 and 2001 and 2000 totaled $161.5 million, $53.4 million $2.0 million and $4.2$2.0 million, respectively. Working capital at September 30, 20022003 was approximately $79.8$249.3 million compared to $79.8 million at September 30, 2002 and $60.5 million at September 30, 2001. Annualized inventoryInventory turns were approximately 6.96.5 for fiscal 2003.
Cash used in operating activities was $72.1 million for fiscal 2003, reflecting a net loss of $451.4 million, offset by non-cash charges (primarily asset impairments, depreciation and amortization) of $489.2 million and a net decrease in working capital items of approximately $109.9 million, including $40.0 million of merger-related expense payments. As of September 30, 2003, substantially all amounts accrued for merger-related expenses have been paid. We adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” on October 1, 2002 and recorded a $397.1 million cumulative effect of a change in accounting principle, representing the fourth quarterdifference between the implied fair value and carrying value of our goodwill. Operating results in fiscal 2003 improved when compared to fiscal 2002, primarily as the result of increased revenues and improved utilization of our manufacturing facilities.
Cash used in investing activities for fiscal 2003 primarily consisted of capital expenditures of $40.3 million. The capital expenditures for fiscal 2003 represent our continued investment in production and test facilities in addition to our commitment to invest in the capital needed to design new products and processes and address new opportunities to meet our customers’ demands. We believe a focused program of capital expenditures will be required to sustain our current manufacturing capabilities. We may also consider acquisition opportunities to extend our technology portfolio and design expertise and to expand our product offerings. Cash used in investing activities for fiscal 2003 also included $4.0 million of purchases of short-term investments. Our short-term investments are classified as held-to-maturity and consist primarily of commercial paper with original maturities of more than 90 days and less than twelve months.
On August 11, 2003 we filed a shelf registration statement on Form S-3 with the SEC with respect to the issuance of up to $250 million aggregate principal amount of securities, including debt securities, common or preferred shares, warrants or any combination thereof. This registration statement, which the SEC declared effective on August 28, 2003, provides us with greater flexibility and access to capital. On September 9, 2003 we issued 9.2 million shares of common stock under our shelf registration statement. Cash provided by financing activities for fiscal 2003 included approximately $102.2 million of net proceeds from this offering. We may from time to time issue securities under the remaining balance of the shelf registration statement for general corporate purposes.
Cash provided by financing activities for fiscal 2003 also included the net impact of our private placement of $230 million of 4.75 percent convertible subordinated notes due 2007 and related debt refinancing with Conexant on November 13, 2002. Additionally, days salesThese subordinated notes can be converted into 110.4911 shares of common stock per $1,000 principal balance, which is the equivalent of a conversion price of approximately $9.05 per share. The net proceeds from the note offering were principally used to prepay $105 million of the $150 million debt to Conexant relating to the purchase of the Mexicali Operations and prepay the $65 million principal amount outstanding includedas of November 13, 2002 under a separate loan facility with Conexant. In connection with our prepayment of $105 million of the $150 million debt owed to Conexant relating to the purchase of the Mexicali Operations, the remaining $45 million principal balance was exchanged for new 15 percent convertible senior subordinated notes with a maturity date of June 30, 2005. These senior subordinated notes can be converted into our common stock at a conversion rate based on the applicable conversion price, which is subject to adjustment based on, among other things, the market price of our common stock. Based on this adjustable conversion price, we expect that the maximum number of shares that could be issued under the senior subordinated notes is approximately 7.1 million shares, subject to adjustment for stock splits and other similar dilutive occurrences. In addition to the retirement of $170 million in principal amount of indebtedness owing to Conexant, we also retained approximately $53 million of net proceeds of the private placement to support our working capital needs. In addition, as of September 30, 2003, Skyworks USA had borrowed $41.7 million under our $50 million Facility Agreement secured by the purchased accounts receivable for the fourth quarter of fiscal 2002 was approximately 57
days.
with Wachovia Bank, National Association.
Cash used in operating activities was $99.1 million and $89.4 million for fiscal 2002 reflecting
aand 2001, respectively. Operating cash flows for fiscal 2002 and 2001 reflect net losslosses of $236.1 million and $318.9 million, respectively, offset by non-cash charges (depreciation and amortization, asset impairments and an in-process research and development charge) of $216.6$221.6 million and $220.8 million, respectively, and a net increase in the non-cash components of
working capital of approximately $79.6 million.$84.6 million and a net decrease of $8.7 million, respectively. During 2002 the Companywe consolidated facilities, reduced itsour work force and continued to implement cost saving initiatives. In addition, increased revenues and improved utilization of our manufacturing facilities contributed to improved operating results in fiscal 2002.
2002 when compared to fiscal 2001.
Cash provided by investing activities for fiscal 2002 consisted of capital expenditures of $29.4 million and dividends to Conexant of $3.1 million offset by cash received of $67.1 million as a result of the Merger and $35.4 million from the sale of short-term investments acquired in the Merger. The capital
expenditures for fiscal 2002 reflect a significant reduction from annual capital
expenditures in fiscal 2001, a key component of the cost reduction initiatives
implemented in fiscal 2002.
Cash provided by financing activities for fiscal 2002 principally consisted of
net transfers from Conexant, pre-Merger, of $50.4 million and $30.0 million of
proceeds from borrowings against the revolving credit facility with Conexant.
On September 30, 2002, the Company had $150 million in short-term promissory
notes payable to Conexant pursuant to a financing agreement entered into in
connection with the purchase of the Mexicali Operations. The notes were secured
by the assets and properties of the Company. Unless paid earlier at the option
of the Company or pursuant to mandatory prepayment provisions contained in the
financing agreement with Conexant, fifty percent of the principal portion of the
short-term promissory notes was due on March 24, 2003, and the remaining fifty
percent of the notes was due on June 24, 2003. Interest on these notes was
payable quarterly at a rate of 10% per annum for the first ninety days following
June 25, 2002, 12% per annum for the next ninety days and 15% per annum
thereafter. Because the Company refinanced these notes, the principal amount was
classified on September 30, 2002 as a long-term note payable. In addition, on
September 30, 2002 the Company had available a short-term $100 million loan
facility from Conexant under the financing agreement to fund the Company's
working capital and other requirements. $75 million of this facility became
available on or after July 10, 2002, and the remaining $25 million balance of
the facility would have become available if the Company had more than $150
million of eligible domestic receivables. The entire principal of any amounts
borrowed under the facility was due on June 24, 2003. There were $30 million of
borrowings as of September 30, 2002 under this facility. Because the Company
refinanced the amounts borrowed under this loan facility, the principal amount
was classified on September 30, 2002 as a long-term note payable.
On November 13, 2002, Skyworks successfully closed a private placement of $230
million of 4.75 percent convertible subordinated notes due 2007. These notes can
be converted into 110.4911 shares of common stock per $1,000 principal balance,
which is the equivalent of a conversion price of approximately $9.05 per share.
The net proceeds from the note offering were principally used to prepay debt
owed to Conexant
23
Skyworks Solutions, Inc. and Subsidiaries
under the financing agreement. The payments to Conexant retired $105 million of
the $150 million note relating to the purchase of the Mexicali Operations and
repaid the $65 million principal amount outstanding as of November 13, 2002
under the loan facility, dissolving the $100 million facility and resulting in
the release of Conexant's security interest in all assets and properties of the
Company.
In connection with the prepayment by the Company of $105 million of the $150
million note owed to Conexant relating to the purchase of the Mexicali
Operations, the remaining $45 million principal balance of the note was
exchanged for new 15% convertible debt securities with a maturity date of June
30, 2005. These notes can be converted into the Company's common stock at a
conversion rate based on the applicable conversion price, which is subject to
adjustment based on, among other things, the market price of the Company's
common stock. Based on this adjustable conversion price, the Company expects
that the maximum number of shares that could be issued under the note is
approximately 7.1 million shares, subject to adjustment for stock splits and
other similar dilutive occurrences.
In addition to the retirement of $170 million in principal amount of
indebtedness owing to Conexant, Skyworks also retained approximately $53 million
of net proceeds of the private placement to support our working capital needs.
Cash used in operating activities was $89.4 million and $53.8 million for fiscal
2001 and 2000, respectively. Operating cash flows for fiscal 2001 and 2000
reflect net losses of $318.9 million and $66.5 million, respectively, offset by
non-cash charges (depreciation and amortization, asset impairments and an
in-process research and development charge) of $220.8 million and $98.1 million,
respectively, and a net decrease in the non-cash components of working capital
of approximately $8.7 million and a net increase of $85.4 million, respectively.
Cash used in investing activities for fiscal 2001 consisted of capital expenditures of $51.1 million. The capital expenditures for fiscal 2002 reflect a significant reduction from annual capital expenditures in fiscal 2001, a key component of the cost reduction initiatives implemented in fiscal 2002. Cash
used in investing activities for fiscal 2000 consisted of capital expenditures
of $100.4 million partially offset by cash received of $7.7 million in the
acquisition of Philsar. The capital expenditures for fiscal 2001 reflect a
significant reduction from annual capital expenditures in fiscal 2000, a key
component of the cost reduction initiatives implemented in fiscal 2001.
Cash provided by financing activities consisted of net transfers from Conexant, pre-Merger, of $138.3$50.4 million and $148.7$138.3 million for fiscal 2002 and 2001, and 2000, respectively. Cash provided by financing activities for fiscal 2002 also consisted of $30.0 million of proceeds from borrowings against the revolving credit facility with Conexant. Historically, Conexant has managed cash on a centralized basis. Cash receipts associated with Washington/Mexicali'sMexicali’s business were generally collected by Conexant, and Conexant generally made disbursements on behalf of Washington/Mexicali.
During fiscal years 1998 through 2001, we made a series of capital investments
which increased the capacity of our Newbury Park gallium arsenide wafer
fabrication facility. We made these investments to support then-current and
anticipated future growth in sales of our wireless communications products, such
as power amplifiers, that use the gallium arsenide process. During the same
period, we made a series of capital investments at our Mexicali facility to
expand our integrated circuit assembly capacity, including the addition of
assembly lines using surface mount technology processes for the production of
multi-chip modules, which the Mexicali facility principally produces for us. The
capital investments also increased the Mexicali facility's test capacity,
including radio frequency capable equipment for testing wireless communications
products. We invested in the Mexicali facility to support then-current and
anticipated future growth in sales of our wireless communications products and
to support increasing demand for assembly and test services from Conexant.
Capital investments for the Newbury Park wafer fabrication facility totaled $0.7
million, $27.3 million and $35.5 million during fiscal 2002, fiscal 2001 and
fiscal 2000, respectively. A significant portion of the fiscal 2001 capital
investments were made to continue or complete capital investment programs that
we had initiated during fiscal 2000. During the second quarter of fiscal 2001,
in response to the broad slowdown affecting the wireless communications sector,
including us and Conexant, we sharply curtailed our capital expenditure
programs.
Although reduced capital expenditures are a key component of the cost reduction
initiatives, a focused program of capital expenditures will be required to
sustain our current manufacturing capabilities. We may also consider acquisition
opportunities to extend our technology portfolio and design expertise and to
expand our product offerings.
24
Skyworks Solutions, Inc. and Subsidiaries
Following is a summary of our contractual payment obligations for consolidated debt, purchase agreements and lease obligationsoperating leases at September 30, 20022003 (seeNotes 58 and 913 of the consolidated financial statements), in thousands:
OBLIGATION TOTAL 1-3 YEARS 4-5 YEARS THEREAFTER
-------- --------- --------- ----------
Debt ..................................... $180,168 $ 45,168 $135,000 $ --
Operating leases ......................... 40,215 19,350 9,212 11,653
-------- -------- -------- --------
Total debt and operating lease obligations $220,383 $ 64,518 $144,212 $ 11,653
======== ======== ======== ========
| Obligation | Total | 1-3 years | 4-5 Years | Thereafter | |||||
|---|---|---|---|---|---|---|---|---|---|
| Debt | $316,681 | $ 86,681 | $230,000 | $ -- | |||||
| Purchase obligations | 51,507 | 51,507 | -- | -- | |||||
| Operating leases | 34,132 | 18,285 | 8,813 | 7,034 | |||||
| $402,320 | $156,473 | $238,813 | $7,034 | ||||||
Under supply agreements entered into with Conexant in connection with the
Merger, the Company's expected minimum purchase obligations will be
approximately $64 million, $39 million and $13 million in fiscal 2003, 2004 and
2005, respectively. These agreements are related toJazz Semiconductor, we receive wafer fabrication, wafer probe and certain other services the Company will receive from Jazz Semiconductor's Newport Beach, California foundry. With the exception of $5.1
million relatedSemiconductor. Pursuant to fiscal 2003 purchase obligations, which has been accrued in
fiscal 2002,these supply agreements, we currently anticipate meeting each of the annualare committed to obtain certain minimum wafer volumes from Jazz Semiconductor. Our expected minimum purchase obligations under the three-yearthese supply agreement with Conexant.
agreements are anticipated to be approximately $39 million and $13 million in fiscal 2004 and 2005, respectively.
Based on our fiscal 2003 results of operations and current trends, and after giving effect to the closing of thenet proceeds we received in our private placement theof 4.75 percent convertible subordinated notes due 2007, our debt refinancing with Conexant, our common stock public offering and current trends,our Facility Agreement, we expect our existing sources of liquidity, together with cash expected to be generated from operations, will be sufficient to fund our research and development, capital expenditures, debt obligations, purchase obligations, working capital and other cash requirements for at least the Company expects to generate sufficient
operating cash to meet our short-term and long-term cash requirements.
next twelve months.
OTHER MATTERS
Inflation did not have a significant impact upon our results of operations during the three-year period ended September 27, 2002.
30, 2003.
In July 2001, the Financial Accounting Standards Board (FASB)(“FASB”) issued Statements
No. 141, "Business Combinations" (SFAS No. 141), andSFAS No. 142, "Goodwill“Goodwill and Other Intangibles" (SFAS No. 142).Intangibles.” SFAS No. 141 requires142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets that have indefinite useful lives are not amortized into results of operations, but instead are evaluated at least annually for impairment and written down when the recorded value exceeds the estimated fair value. We adopted SFAS No. 142 on October 1, 2002, and performed a transitional impairment test for goodwill. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares our fair value to our net book value. In determining fair value, SFAS No. 142 allows for the use of several valuation methodologies, although it states quoted market prices are the purchase
methodbest evidence of accounting and eliminates the usefair value. As part of the pooling-of-interest methodfirst step, we determined that we have one reporting unit for purposes of accounting for business combinations. SFAS No. 141 also requires thatperforming the Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS No. 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. The Company has adoptedfair-value based test of goodwill. This reporting unit is consistent with its single operating segment, which management determined is appropriate under the provisions of SFAS No. 141. Upon adoption131, “Disclosures about Segments of SFAS No. 142, the Company is
required to evaluate its existingan Enterprise and Related Information.” We completed step one and determined that our goodwill and unamortized intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary
reclassifications in order to conform with the new classification criteria in
SFAS No. 141 for recognition separate from goodwill. The Company will be
required to reassess the useful lives and residual values of all intangible
assets acquired, and make any necessary amortization period adjustments by the
endimpaired. Step two of the first interim period after adoption. If an intangible asset is
identified as having an indefinite useful life,analysis compares the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS No. 142 within the first interim period. Impairment is measured as the
excess of carrying value over theimplied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an intangible asset with an
indefinite life. Any impairment loss will be measuredis recognized equal to that excess. We completed step two and determined that the carrying amount of our goodwill was $397.1 million greater than its implied fair value. This transitional impairment charge was recorded as of the date of adoption
and recognized as thea cumulative effect of a change in accounting principle in fiscal 2003. In addition, we completed our annual goodwill impairment test for fiscal 2003 and determined that as of July 1, 2003, our goodwill was not further impaired.
In June 2001, the first interim period.
In connection withFASB issued SFAS No. 142's transitional goodwill impairment evaluation,143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the Statement requires the Company to perform an assessmentretirement of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning thetangible long-lived assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of October 1, 2002. The Company will then have up to six months from October
1, 2002 to determineassociated asset retirement costs. It requires that the fair value of each reporting unit and comparea liability for an asset retirement obligation be recognized in the period in which it to the
carrying amountis incurred if a reasonable estimate of the reporting unit. To the extent the carrying amount of a
reporting unit exceeds the fair value ofcan be made. We adopted the reporting unit, an indication
exists that the reporting unit goodwill may be impaired and the Company must
perform the second step of the transitional impairment test. The second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which would be measured as of the date of adoption. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance withprovisions or SFAS No. 141. The residual fair value after this
allocation is the implied fair value143 on October 1, 2002 and its adoption did not have a material impact on our financial position or results of the reporting unit goodwill. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statement of operations. We may
be required to record a substantial transitional impairment charge as a result
of adopting SFAS No. 142. Management is assessing the impact that adoption of
SFAS No. 142 will have on the Company's financial statements. The carrying value
of goodwill and intangible assets, subject to the transitional impairment test,
is approximately $907.5 million at September 30, 2002.
In August 2001, the Financial Accounting Standards BoardFASB issued SFAS No. 144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets,"” which supersedes previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. Adoption ofWe adopted SFAS No. 144 is required no later thanon October 1, 2002 and recorded asset impairment charges in accordance with its guidance during the beginningfourth quarter of fiscal 2003. Management does not expect the adoption of SFAS No. 144These charges primarily related to have a
significant impact oncertain infrastructure products manufactured at our financial position or results of operations. However,
future impairment reviews may result in charges against earnings to write-down
the value of long-lived assets.
Woburn, Massachusetts and Adamstown, Maryland facilities.
In April 2002, the FASB issued SFAS No. 145, "Rescission“Rescission of FASB Statement No.'s‘s 4, 44, and 64, Amendment of FASB StatementSFAS No. 13 and Technical Corrections",Corrections,” effective for fiscal years beginning May 15, 2002 or later. It rescinds SFAS No. 4, "Reporting“Reporting Gains and Losses From Extinguishments of Debt",Debt,” SFAS No. 64, "Extinguishments“Extinguishments of Debt to Satisfy Sinking-Fund Requirements",Requirements,” and SFAS No. 44, "Accounting“Accounting for Intangible Assets of Motor Carriers".Carriers.” This Statement also amends SFAS No. 13, "Accounting“Accounting for Leases"Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. We do not
believe the impact of adoptingadopted SFAS No. 145 willon October 1, 2002 and its adoption did not have a material impact on our financial statements.
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting“Accounting for Costs Associated With Exit or Disposal Activities".Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. This statementStatement is effective for exit or disposal activities initiated after December 31, 2002. We adopted SFAS No. 146 on October 1, 2002 and its adoption did not have a material impact on our financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are assessingeffective for any guarantees that are issued or modified after December 31, 2002. We adopted FIN 45 on January 1, 2003 and its adoption did not have a material impact on our financial position or results of operations.
In December 2002, the impact that adoptionFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 146 will123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results. SFAS No. 148 is effective for financial statements for fiscal years and interim periods ending after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 on December 15, 2002 and continues to follow APB No. 25, “Accounting for Stock Issued to Employees,” in accounting for employee stock options.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 clarifies situations in which entities shall be subject to consolidation. FIN 46 is effective for all variable interest entities created after January 31, 2003. We adopted FIN 46 on April 1, 2003 and its adoption did not have an impact on our financial statements.
25
Skyworks Solutions, Inc. and Subsidiaries
FORWARD-LOOKING STATEMENTS
This report and other documents we have filed with the SEC contain
forward-looking statements made pursuant to the safe harbor provisionsposition or results of the
Private Securities Litigation Reform Act of 1995. Some of the forward-looking
statements can be identified by the use of forward-looking terms such as
"believes," "expects," "may," "will," "should," "could," "seek," "intends,"
"plans," "estimates," "anticipates" or other comparable terms. Forward-looking
statements involve inherent risks and uncertainties. A number of important
factors could cause actual results to differ materially from thoseoperations.
CERTAIN BUSINESS RISKS
We operate in the forward-looking statements. We urge you to consider the risks and uncertainties
discussed below and elsewhere in this report and in the other documents filed
with the SEC in evaluating our forward-looking statements. We have no plans to
update our forward-looking statements to reflect events or circumstances 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.
CERTAIN BUSINESS RISKS
WE HAVE RECENTLY INCURRED SUBSTANTIAL OPERATING LOSSES AND ANTICIPATE FUTURE
LOSSES.
Our operating results have been adversely affected by a global economic slowdown
and an abrupt decline in demand for many of the end-user products that
incorporate wireless communications semiconductor products and system solutions.
As a result, we incurred substantial operating losses during the twelve-month
period ended September 27, 2002. We expect that reduced end-customer demand,
underutilization of our manufacturing capacity, changes in our revenue mix and
other factors will continue to adversely affect our operating results in the
near term. In order to become profitable, we must achieve substantial revenue
growth and we will face an environment of uncertain demand in the markets for
our products. We cannot assure you as to whether or when we will become
profitable or whether we will be able to sustain such profitability, if
achieved.
WE OPERATE IN THE HIGHLY CYCLICAL WIRELESS COMMUNICATIONS SEMICONDUCTOR
INDUSTRY, WHICH IS SUBJECT TO SIGNIFICANT DOWNTURNS.
Thehighly cyclical wireless communications semiconductor industry, which is highly cyclical and is
characterized by constant and rapid technological change, rapid product
obsolescence and price erosion, evolving technical standards, short product life
cycles and wide fluctuations in product supply and demand.subject to significant downturns.
From time to time these and other factors, together with changes in general economic conditions, together with other factors, cause significant upturns and downturns in the industry. Periods of industry downturns,downturn, as we experienced through most ofbeginning in calendar year 2001, have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. These factors,characteristics, and in particular their impact on the level of demand for digital cellular handsets, may cause substantial fluctuations in our revenues and results of operations. We
have experienced these cyclical fluctuations in our business and may experience
cyclical fluctuations in the future.
During the late 1990's1990‘s and extending into 2000, the wireless communications semiconductor industry enjoyed unprecedented growth, benefiting from the rapid expansion of wireless communication services worldwide and increased demand for digital cellular handsets. DuringHowever, beginning in calendar year 2001, we were adversely impacted by a global economic slowdown and an abrupt decline in demand for many of the end-user products that incorporate our respective wireless communications semiconductor products and system solutions, particularly digital cellular handsets. The impact of weakened end-customer demand was compounded by higher than normal levels of inventories among our original equipment manufacturer, or OEM, subcontractor and distributor customers. We expect thatShould the reduced end-customer demand continue, this could result in underutilization of our manufacturing capacity, changes in revenue mix and other factors willimpacts that would continue to materially and adversely affect our operating results.
Because of the cyclical nature of the wireless communications semiconductor industry, we cannot assure you of the timing, duration or magnitude of any recovery in our industry or that a recovery will occur. We cannot assure you that the wireless communications semiconductor industry will not experience renewed, and possibly more severe and prolonged, downturns in the future, or that our operating results or financial condition will not be adversely affected by them. We have experienced these cyclical fluctuations in our business and may experience cyclical fluctuations in the future.
We have recently incurred substantial operating losses and may experience future losses.
Our operating results have been adversely affected by a global economic slowdown, concerns about inflation, decreased consumer confidence, reduced capital spending, adverse business conditions, and liquidity concerns in the telecommunications and related industries. These factors have lead to an to a slowdown in customer orders, an increase in the number of cancellations and reschedulings of backlog, higher overhead costs as a percentage of our reduced net revenue, and an abrupt decline in demand for many of the end-user products that incorporate wireless communications semiconductor products and system solutions. As a result, we continued to incur operating losses during fiscal 2003 and may experience operating losses in the future. Should the reduced end-customer demand continue for any reason, this could result in underutilization of our manufacturing capacity, reduced revenues or changes in our revenue mix, and other factors that could continue to materially and adversely affect our operating results in the near term. WE ARE SUBJECT TO INTENSE COMPETITION.Due to these economic factors, we cannot assure you as to whether or when we will become profitable or whether we will be able to sustain such profitability, if achieved.
Additionally, the conflict in Iraq as well as other contemporary international conflicts, acts of terrorism and civil and military unrest have augmented the economic slowdown. These continuing and potentially escalating conflicts can be expected to place further pressure on economic conditions in the United States and worldwide. These conditions make it extremely difficult for our customers, our vendors and for us to accurately forecast and plan future business activities. If such conditions continue or worsen, our business, financial condition and results of operations will likely be materially and adversely affected.
The wireless semiconductor markets are characterized by intense competition.
The wireless communications semiconductor industry in general and the markets in which we compete in particular are intensely competitive. We compete with U.S. and international semiconductor manufacturers that are both larger and smaller
than usof all sizes in terms of resources and market share. We currently face significant competition in our markets and expect that intense price and product competition will continue. This competition has resulted in, and is expected to continue to result in, declining average selling prices for our products. We also anticipate
thatproducts and increased challenges in maintaining or increasing market share. Furthermore, additional competitors willmay 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 marketmarkets include, among others:
- time-to-market;
- new product innovation;
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Skyworks Solutions, Inc.
| • time-to-market; • timely new product innovation; • product quality, reliability and performance; • product price; • features available in products; • compliance with industry standards; • strategic relationships with customers; and • access to and |
We cannot assure you that we will be able to successfully address these factors. Many of our competitors have advantages over us, including:
- longer presence in key markets;
- greater name recognition;
- ownership or control of key technology or intellectual property; and
- greaterenjoy the benefit of:
| • long presence in key markets; • name recognition; • high levels of customer satisfaction; • ownership or control of key technology or intellectual property; and • 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 our customers, resellers or other third parties. These relationships may affect customers'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. OUR SUCCESS DEPENDS UPON OUR ABILITY TO DEVELOP NEW PRODUCTS AND REDUCE COSTS IN
A TIMELY MANNER.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 is highly cyclical and characterized by constant and rapid technological change, rapid product evolution, price erosion, evolving technical standards, short product life cycles, increasing demand for higher levels of integration and increased miniaturization, and wide fluctuations in product supply and demand. In particular, the markets into which we sell demand cutting-edge technologies and new and innovative products. Our operating results depend largely on our ability to continue to introduce new and enhanced products on a timely basis. The development and commercialization of semiconductor devices, modules and system solutions is highly complex. Successful product development and introduction depends on numerous factors, including:
- the ability to anticipate customer and market requirements and
changes in technology and industry standards;
- the ability to define new products that meet customer and market
requirements;
- the ability to complete development of new products and bring
products to market on a timely basis;
- the ability to differentiate our products from offerings of our
competitors; and
-
| • the ability to anticipate customer and market requirements and changes in technology and industry standards; • the ability to obtain capacity sufficient to meet customer demand; • the ability to define new products that meet customer and market requirements; • the ability to complete development of new products and bring products to market on a timely basis; • the ability to differentiate our products from offerings of our competitors; • overall market acceptance of our products; and • the ability to obtain adequate intellectual property protection for our new products. |
We cannot assure you that we will have sufficient resources to make the substantial investment in research and development in orderneeded to develop and bring to market new and enhanced products in a timely manner. We will be required to continually to 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.competitors or to changes in the design or specifications of complementary products of third parties to which our products interface.
In addition, prices of established products may decline, sometimes significantly, over time. We believe that to remain competitive we must continue to reduce the cost of producing and delivering existing products at the same time that we develop and introduce new or enhanced products. We cannot assure you that we will be able to continue to reduce the cost of our products to remain competitive.
WE MAY NOT BE ABLE TO KEEP ABREAST OF THE RAPID TECHNOLOGICAL CHANGES IN OUR
MARKETS.
The markets into which we sell our products are characterized by rapid technological change.
The demand for our products can change quickly and in ways we may not anticipate. Our markets generally exhibit the following characteristics:
- rapid technological developments;
-
| • rapid technological developments and product evolution; • rapid changes in customer requirements; • frequent new product introductions and enhancements; • demand for higher levels of integration, decreased size and decreased power consumption; • short product life cycles with declining prices over the life cycle of the product; and • evolving industry standards. |
These changes in customer requirements;
27
Skyworks Solutions, Inc. and Subsidiaries
- frequent new product introductions and enhancements;
- short product life cycles with declining prices overour markets may contribute to the life cycleobsolescence of the product; and
- evolving industry standards.our products. Our products could become obsolete or less competitive sooner than anticipated because of a faster than anticipated change in one or more of the technologies
relatedabove-noted factors.
The ability to our products or in market demand for products based on a particular
technology, particularly dueattract and retain qualified personnel to the introduction of new technology that
represents a substantial advance over current technology. Currently accepted
industry standards are also subject to change, which may contribute to the obsolescencedesign, development, manufacture and sale of our products.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL NECESSARY FOR THE
DESIGN, DEVELOPMENT, MANUFACTURE AND SALE OF OUR PRODUCTS. OUR SUCCESS COULD BE
NEGATIVELY AFFECTED IF KEY PERSONNEL LEAVE.products is critical to our success.
As the source of our technological and product innovations, our key technical personnel represent a significant asset. Our success depends on our ability to continue to attract, retain and motivate qualified personnel, including executive officers and other key management and technical personnel. As the source of our technological and product innovations,
our key technical personnel represent a significant asset. The competition for management and technical personnel is intense in the semiconductor industry. Weindustry, and we therefore cannot assure you that we will be able to attract and retain qualified management and other personnel necessary for the design, development, manufacture and sale of our products. We may have particular difficulty attracting and retaining key personnel during periods of poor operating performance, given, among other things, the use of equity-based compensation by us and our competitors. The loss of the services of one or more of our key employees or our inability to attract, retain and motivate qualified personnel, could have a material adverse effect on our ability to operate our business.
IF OEMS 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.
If OEMs and ODMs of communications electronics products do not design our products into their equipment, we will havedifficulty selling those products. Moreover, a “design win” from a customer does not guarantee future sales to that customer
Our products will not be sold directly to the end-user but will be components or subsystems of other products. As a result, we will 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" from OEMs,“design wins,” we would have difficulty selling our products. Once an OEMIf a manufacturer designs another supplier'ssupplier’s product into one of its product platforms, it is more difficult for us to achieve future design wins with that OEM product platform because changing suppliers involves significant cost, time, effort and risk on the part of that OEM.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 may be unablecannot assure you that we will continue to achieve design wins or to convert design wins into actual sales.
BECAUSE OF THE LENGTHY SALES CYCLES OF MANY OF OUR PRODUCTS, WE MAY INCUR
SIGNIFICANT EXPENSES BEFORE WE GENERATE ANY REVENUES RELATED TO THOSE PRODUCTS.
Our
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 is has been developed, tested, and manufactured, our customers may need three to six months or longer to integrate, test and evaluate our products and an additional three to six months or more to begin volume production of equipment that
incorporates ourthe products. TheThis lengthy period ofcycle time required 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, andproducts. Furthermore, we may never generate the anticipated revenues from a product after incurring such expenses if our customer cancels or changes its product plans.
UNCERTAINTIES INVOLVING THE ORDERING AND SHIPMENT OF OUR PRODUCTS COULD
ADVERSELY AFFECT OUR BUSINESS.
Uncertainties involving the ordering and shipment of our products could adversely affect our business.
Our sales will typically be made pursuant to individual purchase orders and not under long-term supply arrangements with our customers. Our customers may cancel orders prior tobefore shipment. Additionally, we will sell a portion of our products through distributors, some of whom will have rights to return unsold products. We may purchase and manufacture inventory based on estimates of customer demand for our products, which is difficult to predict. This difficulty may be compounded when we sell to OEMs indirectly through distributors or contract manufacturers, or both, as our forecasts of demand will then be based on estimates provided by multiple parties. In addition, our customers may change their inventory practices on short notice for any reason. The cancellation or deferral of product orders, the return of previously sold products, or overproduction due to the failure ofa change in anticipated orders to materialize,order volumes, could result in us holding excess or obsolete inventory, which could result in inventory write-downs.
28
Skyworks Solutions, Inc.write-downs and, Subsidiaries
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.in turn, could have a material adverse effect on our financial condition.
Our reliance on a small number of customers for a large portion of our sales could have a material adverse effect on the results of our operations.
A significant portion of our sales are concentrated among a limited number of customers. If we lost one or more of these major customers, or if one or more major customers significantly decreased its orders of our products, our business would be materially and adversely affected. Sales to Samsung Electronics Co. and to Motorola, Inc. represented approximately 38%15% and 12%11%, respectively, of net revenues from customers other Conexant duringfor fiscal 2002 on a historical basis
(such sales representing Washington/Mexicali sales for the fiscal year through
June 25, 2002, and sales of Skyworks, the combined company, for the post-merger
period from June 26, 2002 through the end of the fiscal year).2003. Our future operating results will depend on the success of these customers and other customers and our success in selling products to them.
WE FACE A RISK THAT CAPITAL NEEDED FOR OUR BUSINESS WILL NOT BE AVAILABLE WHEN
WE NEED IT.
Average product life cycles in the semiconductor industry tend to be very short.
In the semiconductor industry, product life cycles tend to be short relative to the sales and development cycles. Therefore, the resources devoted to product sales and marketing may not result in material revenue, and from time to time we may need to write off excess or obsolete inventory. If we were to incur significant marketing expenses and investments in inventory that we are not able to recover, and we are not able to compensate for those expenses, our operating results would be materially and adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed.
Our leverage and our debt service obligations may adversely affect our cash flow.
On September 30, 2003, after giving effect to unused availability under our receivable financing credit facility with Wachovia Bank, National Association, we would have had total indebtedness of approximately $325 million, which would have represented approximately 34% of our total capitalization.
As long as our 4.75 percent convertible subordinated notes remain outstanding, we will have debt service obligations on such notes of approximately $10,925,000 per year in interest payments. In addition, we will have debt service obligations on our 15 percent convertible senior subordinated notes due June 30, 2005, originally issued to Conexant, of approximately $6,750,000 per year. If we issue other debt securities in the future, our debt service obligations will increase. If we are unable to generate sufficient cash to meet these obligations and must instead use our existing cash or investments, we may have to reduce or curtail other activities of our business.
We intend to fulfill our debt service obligations from cash generated by our operations, if any, and from our existing cash and investments. If necessary, among other alternatives, we may add lease lines of credit to finance capital expenditures and we may obtain other long-term debt, lines of credit and other financing.
Our indebtedness could have significant negative consequences, including:
| • increasing our vulnerability to general adverse economic and industry conditions; • limiting our ability to obtain additional financing; • requiring the dedication of a substantial portion of any cash flow from operations to service our indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures; • limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and • placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources. |
Despite our current debt levels, we are able to incur substantially more debt, which would increase the risks described above.
We face a risk that capital needed for our business will not be available when we need it.
We will need to obtain sources of financing in the future. After giving effect to the net proceeds we received inof our $102 million offering on or about September 12, 2003, our $230 million private placement of 4.75 percent convertible subordinated notes due 2007, and our $45 million debt refinancing with Conexant and our receivables financing credit facility with Wachovia Bank, National Association, we believe that our existing sources of liquidity, together with cash expected to be generated from operations, will be sufficient to fund our research and development, capital expenditure, working capital and other financing requirements for at least the next twelve months.
However, we cannot assure you that the capital required to fund these expenses will be available in the future. Conditions existing in the U.S. capital markets when we seek financing as well as the then current condition of the Company seeks financing will affect our ability to raise capital, as well as the terms of any financing. The CompanyWe may not be able to raise enough capital to meet our capital needs on a timely basis or at all. Failure to obtain capital when required would have a material adverse effect on the Company.
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 MANUFACTURING PROCESSES ARE EXTREMELY COMPLEX AND SPECIALIZED.
Our manufacturing processes are extremely complex and specialized.
Our manufacturing operations are complex and subject to disruption, due toincluding 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 not to function.
Ourmalfunction. Because our operating results are highly dependent upon our ability to produce integrated circuits at acceptable manufacturing yields. Ouryields, these factors present could have a material adverse affect on our business. In addition, we may discover from time to time defects in our products after they have been shipped, which may require us to replace such products.
Additionally, our operations may be affected by lengthy or recurring disruptions of operations at any of our production facilities or those of our subcontractors. These disruptions may include electrical power outages, fire, earthquake, flooding, war, acts of terrorism, or other natural or man-made disasters. Disruptions of our manufacturing operations could cause significant delays in shipments until we are able to shift the products from an affected facility or subcontractor to another facility or subcontractor. In the event of these types ofsuch delays, we cannot assure you that the required alternative capacity, particularly wafer production capacity, would be available on a timely basis or at all. Even if alternative wafer production or assembly and test capacity is available, we may not be able to obtain it on favorable terms, which could result in higher costs and/or a loss of customers. We may be unable to obtain sufficient manufacturing capacity to meet demand, either at our own facilities or through external manufacturing or similar arrangements with others.
Due to the highly specialized nature of the gallium arsenide integrated circuit manufacturing process, in the event of a disruption at the Newbury Park, California or Woburn, Massachusetts semiconductor wafer fabrication facilities, alternative gallium arsenide production capacity would not be immediately available from third-party sources. These disruptions could have a material adverse effect on our business, financial condition and results of operations.
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Skyworks Solutions, Inc.
We may not be able to maintain and Subsidiaries
WE MAY NOT BE ABLE TO ACHIEVE MANUFACTURING YIELDS THAT CONTRIBUTE POSITIVELY TO
OUR GROSS MARGIN AND PROFITABILITY.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 accurately 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 are dependent upon third parties for the manufacture, assembly and test of our products.
We rely upon independent wafer fabrication facilities, called foundries, to provide silicon-based products and to supplement our gallium arsenide wafer manufacturing capacity. We also utilize subcontractors to package, assemble and test our products. There are significant risks associated with reliance on third-party foundries, including:
- the lack of ensured wafer supply, potential wafer shortages and
higher wafer prices;
- limited control over delivery schedules, manufacturing yields,
production costs and product quality; and
-
| • the lack of ensured wafer supply, potential wafer shortages and higher wafer prices; • limited control over delivery schedules, manufacturing yields, production costs and quality assurance; and • the inaccessibility of, or delays in obtaining access to, key process technologies. |
Although we have long-term supply arrangements to obtain additional external manufacturing capacity, the third-party foundries we use may allocate their limited capacity to the production requirements of other customers. If we choose to use a new foundry, it will typically take an extended period of time to complete the qualification process before we can begin shipping products from the new foundry. The foundries may experience financial difficulties, be unable to deliver products to us in a timely manner or suffer damage or destruction to their facilities, particularly since some of them are located in earthquake zones. If any disruption of manufacturing capacity occurs, we may not have alternative manufacturing sources immediately available. We may therefore experience difficulties or delays in securing an adequate supply of our products, which could impair our ability to meet our customers'customers’ needs and have a material adverse effect on our operating results.
We also intend to utilize subcontractors to package, assembleare dependent upon third parties for the supply of raw materials and test a portioncomponents.
Our manufacturing operations depend on obtaining adequate supplies of raw materials and the components used in our products. Because we rely on others to package, assemble or test our
products, we are subject to many of the same risks as are described above with
respect to foundries.
WE ARE DEPENDENT UPON THIRD PARTIES FOR THE SUPPLY OF RAW MATERIALS AND
COMPONENTS.manufacturing processes. We believe we have adequate sources for the supply of raw materials and components for our manufacturing needs with suppliers located around the world. However,While we do not typically rely on a single source of supply for our raw materials, we are currently dependent on two suppliersa sole-source supplier for epitaxial wafers used in the gallium arsenide semiconductor manufacturing processes at our manufacturing facilities. Nevertheless, while we historically have not
experienced any significant difficulties in obtaining an adequate supply of raw
materials, including epitaxial wafers, and components necessary for our
manufacturing operations, weWe cannot assure you that we will not lose a significant or sole supplier or that a supplier will be able to meet performance and quality specifications or delivery schedules. If we lost a supplier or a supplier were unable to meet performance or quality specifications or delivery schedules, our ability to satisfy customer obligations could be materially and adversely affected. In addition, we review our relationships with suppliers of raw materials and components for our manufacturing needs on an ongoing basis. In connection with our ongoing review, we may modify or terminate our relationship with one or more suppliers. We may also enter into other sole supplier arrangements to meet certain of our raw material or component needs. If we were to enter into an additional sole supplier arrangement for any of our raw materials or components, the risks associated with our supply arrangements would be exacerbated.
Under a supply agreementagreements entered into with Conexant in connection with the
Merger,and Jazz Semiconductor, Inc. we receive wafer fabrication, wafer probe and certain other services from Jazz Semiconductor, Inc., a Newport Beach, California foundry joint venture
between Conexant and The Carlyle Group.Semiconductor. Pursuant to ourthese supply agreement with
Conexant,agreements, we are initially obligatedcommitted to obtainobtaining certain minimum volume levelswafer volumes from Jazz Semiconductor based on a contractual agreement between Conexant and Jazz Semiconductor. Our expected minimum purchase obligations under thisthese supply agreementagreements are anticipated to be approximately $64 million, $39 million and $13 million, respectively, in fiscal 2003, 2004 and 2005.
Remaining competitive in the semiconductor industry requires transitioning to smaller geometry process technologies and achieving higher levels of design integration.
In order to remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify the manufacturing processes for our products, design new products to more stringent standards, and to redesign some existing products. In the past, we have experienced some difficulties migrating to smaller geometry process technologies or new manufacturing processes, which resulted in sub-optimal manufacturing yields, delays in product deliveries and increased expenses. We estimatemay 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 minimum purchase
obligation underfoundries 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 agreement will result in excess coststransition or fail to efficiently implement this transition, our business, financial condition and results of approximately
$5.1 millionoperations could be materially and adversely affected. As smaller geometry processes become more prevalent, we have recorded this liabilityexpect to continue to integrate greater levels of functionality, as well as customer and charged costthird party intellectual property, into our products. However, we may not be able to achieve higher levels of sales in
fiscal 2002.
30
Skyworks Solutions, Inc. and Subsidiaries
WE ARE SUBJECT TO THE RISKS OF DOING BUSINESS INTERNATIONALLY.design integration or deliver new integrated products on a timely basis, or at all.
We are subject to the risks of doing business internationally.
Historically, a substantial majority of the Company'sCompany’s net revenues from customers other than Conexant were derived from customers located outside the United States, primarily countries located in the Asia-Pacific region and Europe. In addition, we have design centers and suppliers located outside the United States, and third-party packaging, assembly and test facilities and foundries located in the Asia-Pacific region. Finally, we have our own packaging, assembly and test facility in Mexicali, Mexico. Our international sales and operations are subject to a number of risks inherent in selling and operating abroad. These include, but are not limited to, risks regarding:
- currency exchange rate fluctuations;
- local economic and political conditions;
- disruptions of capital and trading markets;
- restrictive governmental actions (such as restrictions on transfer
of funds and trade protection measures, including export duties and
quotas and customs duties and tariffs);
- changes in legal or regulatory requirements;
- limitations on the repatriation of funds;
- difficulty in obtaining distribution and support;
-
| • currency exchange rate fluctuations; • local economic and political conditions, including social, economic and political instability; • disruptions of capital and trading markets; • restrictive governmental actions (such as restrictions on transfer of funds and trade protection measures, including export duties, quotas, customs duties, import or export controls and tariffs); • changes in legal or regulatory requirements; • natural disasters, acts of terrorism, widespread illness and war; • limitations on the repatriation of funds; • difficulty in obtaining distribution and support; • cultural differences in the conduct of business; • the laws and policies of the United States and other countries affecting trade, foreign investment and loans, and import or export • licensing requirements; • tax laws; • the possibility of being exposed to legal proceedings in a foreign jurisdiction; and • limitations on our ability under local laws to protect or enforce our intellectual property rights in a particular foreign jurisdiction. |
Additionally, we are subject to risks in certain global markets in which wireless operators provide subsidies on handset sales to their customers. Increases in handset prices that negatively impact handset sales can result from changes in regulatory policies or other factors, which could impact the demand for our products. Limitations or changes in policy on phone subsidies in South Korea, Japan, China and other countries affecting trade, foreign investment and loans, and import or export
licensing requirements;
- tax laws; and
- limitationsmay have additional negative impacts on our ability under local laws to protect our
intellectual property.
Because our international sales are denominated in U.S. dollars our products
could become less competitive in international markets if the value of the U.S.
dollar increases relative to foreign currencies. Moreover, werevenues.
Our operating results may be competitively disadvantaged relative to our competitors located outside the
United States who may benefit from a devaluation of their local currency. We
cannot assure you that the factors described above will not have a material
adverse effect on our ability to increase or maintain our international sales.
OUR OPERATING RESULTS MAY BE NEGATIVELY AFFECTED BY SUBSTANTIAL QUARTERLY AND
ANNUAL FLUCTUATIONS AND MARKET DOWNTURNS.adversely affected by substantial quarterly and annual fluctuations and market downturns.
Our revenues, earnings and other operating results have fluctuated in the past and our revenues, earnings and other operating results may fluctuate in the future. These fluctuations are due to a number of factors, many of which are beyond our control.
These factors include, among others:
- changes in end-user demand for the products (principally digital
cellular handsets) manufactured and sold by our customers;
- the effects of competitive pricing pressures, including decreases in
average selling prices of our products;
- production capacity levels and fluctuations in manufacturing yields;
- availability and cost of products from our suppliers;
- the gain or loss of significant customers;
- our ability to develop, introduce and market new products and
technologies on a timely basis;
- new product and technology introductions by competitors;
- changes in the mix of products produced and sold;
- market acceptance of our products and our customers;
- intellectual property disputes;
- seasonal customer demand;
- the timing of receipt, reduction or cancellation of significant
orders by customers; and
- the timing and extent of product development costs.
| • changes in end-user demand for the products (principally digital cellular handsets) manufactured and sold by our customers; • the effects of competitive pricing pressures, including decreases in average selling prices of our products; • production capacity levels and fluctuations in manufacturing yields; • availability and cost of products from our suppliers; • the gain or loss of significant customers; • our ability to develop, introduce and market new products and technologies on a timely basis; • new product and technology introductions by competitors; • changes in the mix of products produced and sold; • market acceptance of our products and our customers; • intellectual property disputes; |
The foregoing factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our quarterly or annual operating results. If our operating results fail to meet the expectations of analysts or investors, it could materially and adversely affect the price of our common stock.
31
Skyworks Solutions, Inc.stock.
Global economic conditions that impact the wireless communications industry could negatively affect our revenues and Subsidiaries
OUR GALLIUM ARSENIDE SEMICONDUCTORS MAY NOT CONTINUE TO BE COMPETITIVE WITH
SILICON ALTERNATIVES.operating results.
Global economic weakness can have wide-ranging effects on markets that we serve, particularly wireless communications equipment manufacturers and network operators. The wireless communications industry appears to be recovering from an industry-wide recession. We cannot predict whether a recovery will continue, the rate of any such recovery, or what effects negative events, such as war, may have on the economy or the wireless communications industry. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to the global economy and to the wireless communications industry and create further uncertainties. Further, an economic recovery may not benefit us in the near term. If it does not, our ability to increase or maintain our revenues and operating results may be impaired.
Our gallium arsenide semiconductors may cease to be competitive with silicon alternatives.
Among our product portfolio, we manufacture and sell gallium arsenide semiconductor devices and components, principally power amplifiers and switches. The production of gallium arsenide integrated circuits is more costly than the production of silicon circuits. As a
result,The cost differential is due to higher costs of raw materials for gallium arsenide and higher unit costs associated with smaller sized wafers and lower production volumes. Therefore, to remain competitive we must offer gallium arsenide products that provide superior performance to that of silicon for specific applications to be competitive withover their respective silicon products.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. It is expected thatWe expect the costs of producing gallium arsenide integrated circuitsdevices will continue to exceed the costs associated with the production of producing their silicon circuits. The costs
differ because of higher costs of raw materials for gallium arsenide and higher
unit costs associated with smaller sized wafers and lower production volumes.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 superiorattributes of gallium arsenide solutions.
We may be subject to claims of infringement of third-party intellectual property rights, or demands that offered by silicon solutions.
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.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.technology or refrain from using it. At the present time, we are in discussions with a third party whoQualcomm Incorporated regarding claims we are
infringingeach of us have filed and served against the other asserting violations of certain of theirour respective intellectual property rights. The third party has
filedpurpose of these discussions is to arrive at a complaint in this matter but has not yet served Skyworks with the
complaint. Although webusiness resolution that avoids protracted litigation for both parties. We believe that thesetheir claims are without merit and if we are in
discussions withnot successful resolving this party to avoid litigation. The third party has indicated
its willingness to resolve these claims without litigation if this third party
were to proceed withmatter outside of litigation, we are prepared to vigorously defend against these claims. Moreover, we believe that the patent infringementtheir claims that were
asserted would impact only a limited number ofand fully prosecute our RF IC product line which
presently accounts for less than 5% of our annualized revenues.claims against them.
Any litigation to determine the validity of claims that our products infringe or may infringe theseintellectual 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;
- cease the manufacture, import, use, sale or offer for sale of
infringing products or processes;
- discontinue the use of infringing technology;
- expend significant resources to develop non-infringing technology;
and
-
| • pay substantial damages; • cease the manufacture, import, use, sale or offer for sale of infringing products or processes; • discontinue the use of infringing technology; • expend significant resources to develop non-infringing technology; and • 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 adversely affected if we were required to do any one or more of the foregoing items.
Many of our products incorporate technology licensed or acquired from third parties.
We sell products in markets that are characterized by rapid technological changes, evolving industry standards, frequent new product introductions, short product life cycles and increasing levels of integration. Our ability to keep pace with this market depends on our ability to obtain technology from third parties on commercially reasonable terms to allow our products to remain in a competitive posture. If licenses to such technology are not available on commercially reasonable terms.
IF WE ARE NOT SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS, IT MAY
HARM OUR ABILITY TO COMPETE.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;
- any existing or future patents, copyrights, trademarks, trade
secrets or other intellectual property rights will not be
challenged, invalidated or circumvented; or
- any of the measures described above would provide meaningful
protection.
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Skyworks Solutions, Inc. and Subsidiaries
| • 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; • any existing or future patents, copyrights, trademarks, trade secrets or other intellectual property rights or ours will not be challenged, invalidated or circumvented; or • 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 patentsintellectual 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. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited for certain technologies and in certain foreign countries.
OUR SUCCESS DEPENDS, IN PART, ON OUR ABILITY TO EFFECT SUITABLE INVESTMENTS,
ALLIANCES AND ACQUISITIONS, AND WE MAY HAVE DIFFICULTY INTEGRATING COMPANIES WE
ACQUIRE. SKYWORKS' MERGER WITH THE WIRELESS BUSINESS OF CONEXANT PRESENTS SUCH
RISKS.
Our success depends, in part, on our ability to effect suitable investments, alliances and acquisitions, and to integrate companies we acquire, and on our continued success integrating the wireless business of Conexant with the Company.
Although we intend to invest significant resources in internal research and development activities, the complexity and rapidity of technological changes and the significant expense of internal research and development make it impractical for us to pursue development of all technological solutions on our own. On an ongoing basis, we intend to review investment, alliance and acquisition prospects that would complement our product offerings, augment our market coverage or enhance our technological capabilities. However, we cannot assure you that we will be able to identify and consummate suitable investment, alliance or acquisition transactions in the future. Moreover, if we consummate such transactions, they could result in:
- issuances of equity securities dilutive to our stockholders;
- large one-time write-offs;
- the incurrence of substantial debt and assumption of unknown
liabilities;
- the potential loss of key employees from the acquired company;
- amortization expenses related to intangible assets; and
- the diversion of management's
| • issuances of equity securities dilutive to our stockholders; • large one-time write-offs; • the incurrence of substantial debt and assumption of unknown liabilities; • the potential loss of key employees from the acquired company; • amortization expenses related to intangible assets; and • the diversion of management’s attention from other business concerns. |
Moreover, integrating acquired organizations and their products and services may be difficult, expensive, time-consuming and a strain on our resources and our relationship with employees and customers and ultimately may not be successful. Additionally, in periods following an acquisition, we will be required to evaluate goodwill and acquisition-related intangible assets for impairment. When such assets are found to be impaired, they will be written down to estimated fair value, with a charge against earnings. Integrating acquired organizations and their products and servicesFor instance, we recorded a cumulative effect of a change in accounting principle in fiscal 2003 in the amount of $397.1 million as a result of the goodwill obtained in connection with the Merger.
We may be difficult, expensive, time-consumingresponsible for payment of a substantial amount of U.S. federal income and a strain on our resources and our
relationship with employees and customers and ultimately may not be successful.
WE MAY BE RESPONSIBLE FOR PAYMENT OF A SUBSTANTIAL AMOUNT OF U.S. FEDERAL INCOME
AND OTHER TAXES UPON CERTAIN EVENTS.other taxes upon certain events.
In connection with Conexant'sConexant’s spin-off of its wireless business prior to the Merger, Conexant sought and received a ruling from the Internal Revenue Service to the effect that certain transactions related to and including the spin-off qualified as a reorganization and as tax-free for U.S. federal income tax purposes. While the tax ruling generally is binding on the Internal Revenue Service, the continuing validity of the ruling is subject to certain factual representations and assumptions. In connection with the Merger we entered into a tax allocation agreement with Conexant that generally provides, among other things, that we will be responsible for certain taxes imposed on various persons (including Conexant) as a result of either:
-
| • the failure of certain spin-off transactions to qualify as a reorganization for • the failure of certain spin-off transactions to qualify as tax-free to Conexant for certain U.S. federal income tax purposes, |
if such failure is attributable to certain actions or transactions by or in respect of Skyworks (including our subsidiaries) or our stockholders, such as the acquisition of stock of Skyworks by a third party at a time and in a manner that would cause such failure. In addition, the tax allocation agreement provides that we will be responsible for various other tax obligations and for compliance with various representations, statements, and conditions made in the course of obtaining the tax ruling referenced above and in connection with the tax allocation agreement. Our obligations under the tax allocation agreement have been limited by a letter agreement dated November 6, 2002 entered into in connection with our debt refinancing with Conexant. Nevertheless, if we do not carefully monitor our compliance with the requirements imposed as a result of the spin-off and related transactions and our responsibilities under the tax allocation agreement, we might inadvertently trigger an obligation to 33
Skyworks Solutions, Inc. and Subsidiaries
indemnify certain persons (including Conexant) pursuant to the tax allocation agreement or other obligations under such agreement. In addition, our indemnity obligations could discourage or prevent a third party from making a proposal to acquire Skyworks.
If we were required to pay any of the taxes described above, the payment could be very substantial and have a material adverse effect on our business, financial condition, results of operations and cash flow.
In addition, it is expected that the interest payments we are required to make on theour $45 million principal amount of 15% convertible senior subordinated notes due June 30, 2005 originally issued to Conexant will not be deductible for U.S. federal
income tax purposes. Our inability to offset our interest expense from these obligationsnotes against other income may increase our tax liability currently and in future years.
Further, the terms of the 15% convertiblethese senior subordinated notes due June 30,
2005 issued to Conexant require us to pay the principal due at the maturity date or upon certain acceleration events in a number of shares of our common stock equal to the principal due at such time divided by the applicable conversion price on such date. If the fair market value of our common stock on such date is less than the applicable conversion price, of such notes, we may recognize cancellation of indebtedness income for federal income tax purposes equal to the excess of the principal amount of suchthese notes due at such time over the fair market value of the common stock issued by us to satisfy our obligations under thethese notes.
CERTAIN PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS AND DELAWARE LAW MAY MAKE IT
DIFFICULT FOR SOMEONE TO ACQUIRE CONTROL OF US.
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;
- 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% 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%
| • 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; • 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 percent 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 percent 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 percent 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 percent or more of our shares; • a fair price provision; and • a requirement that the affirmative vote of at least 90 percent 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.
WE MAY BE LIABLE FOR PENALTIES UNDER ENVIRONMENTAL LAWS, RULES AND REGULATIONS,
WHICH COULD ADVERSELY IMPACT OUR BUSINESS.
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. While we have not experienced any material adverse effect on our operations as a result of such regulations, we cannot assure you that current or future regulations 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 regardless of fault. Consequently, it is often difficult to estimate the future impact of environmental matters, including potential liabilities. 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.
34
Skyworks Solutions, Inc.
Our stock price has been volatile and Subsidiaries
WE WILL ADOPT NEW ACCOUNTING POLICIES IN FISCAL 2003 THAT COULD NEGATIVELY
IMPACT OUR EARNINGS FOR THAT YEAR.
In our fiscal year 2003, which began on September 28, 2002, we must adopt SFAS
No. 142 "Goodwill and Other Intangible Assets." This policy will require us to
evaluate the goodwill and intangible assets with indefinite lives that we report
on our balance sheet for potential impairment using a fair value method. If we
determine that our goodwill and other intangible assets with indefinite lives
are impaired, we will be required to report non-cash charges to our earnings in
fiscal year 2003may fluctuate in the amountfuture. Accordingly, you might not be able to sell your shares of such impairment. At September 27, 2002, we
reported goodwill and intangible assets of $940,686,000. As a result,common stock at or above the adoption of SFAS No. 142 may result in asset write-downs on our balance sheet
and significant non-cash charges to earnings in fiscal 2003. Management is
assessing the impact that adoption of SFAS 142 will have on our financial
statements.
OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE.price you paid for them.
The trading price of our common stock has and may continue to fluctuate significantly. This priceSuch fluctuations may be influenced by many factors, including: - our performance and prospects;
- the performance and prospects of our major customers;
- the depth and liquidity of the market for our common stock;
- investor perception of us and the industry in which we operate;
- changes in earnings estimates or buy/sell recommendations by
analysts;
- general financial and other market conditions; and
-
| • our performance and prospects; • the performance and prospects of our major customers; • the depth and liquidity of the market for our common stock; • investor perception of us and the industry in which we operate; • changes in earnings estimates or buy/sell recommendations by analysts; • general financial and other market conditions; and • domestic and international economic conditions. |
Public stock markets have experienced, and are currently experiencing, extreme price and trading volume volatility, particularly in the technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies. These broad market fluctuations may materially and adversely affect the market price of our common stock.
In addition, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterly basis.
OUR DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW.
For so long as the 4.75 percent convertible subordinated notes we issued in a
private placement in November 2002 remain outstanding, we will have debt service
obligations on the notes of approximately $10,925,000 per year in interest
payments. In addition, we have extended the maturity of certain outstanding debt
under a financing agreement with Conexant, as amended, which bears interest at a
rate of 15% per year. If we issue other debt securities in the future, our debt
service obligations will increase. If we are unable to generate sufficient cash
to meet these obligations and must instead use our existing cash or investments,
we may have to reduce or curtail other activities of our business.
We intend to fulfill our debt service obligations from cash generated by our
operations, if any, and from our existing cash and investments. If necessary,
among other alternatives, we may add lease lines of credit to finance capital
expenditures and we may obtain other long-term debt, lines of credit and other
financing.
Our indebtedness could have significant negative consequences, including:
- increasing our vulnerability to general adverse economic and
industry conditions;
- limiting our ability to obtain additional financing;
- requiring the dedication of a substantial portion of any cash flow
from operations to service our indebtedness, thereby reducing the
amount of cash flow available for other purposes, including capital
expenditures;
35
Skyworks Solutions, Inc. and Subsidiaries
- limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we compete; and
- placing us at a possible competitive disadvantage to less leveraged
competitors and competitors that have better access to capital
resources.
ITEM 7A7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks, such as changes in currency and interest rates, that arise from normal business operation. Our financial instruments include cash and cash equivalents, short-term debt and long-term debt. Our main investment objective is the preservation of investment capital. Consequently, we invest with only high-credit-quality issuers and we limit the amount of our credit exposure to any one issuer. We do not use derivative instruments for speculative or investment purposes.
Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of September 27, 2002,30, 2003, the carrying value of our cash and cash equivalents approximates fair value. Our long-termshort-term debt primarily consists of borrowings under our receivables purchase agreement. As of September 30, 2003, we had borrowed $41.7 million under this agreement. In addition, our short-term debt includes the remaining portion of a ten-year $960,000 loan from the State of Maryland under the Community Development Block Grant program. Quarterly payments
areprogram due through December 2003 at an interest rate of 5 percent. Interest related to our short-term debt is at a fixed rate. Consequently, we do not have significant cash flow exposure on our short-term debt.
We issued fixed-rate debt, which is convertible into our common stock at a predetermined or market related conversion price. Convertible debt has characteristics that give rise to both interest-rate risk and represent principal plus interest at 5%market risk because the fair value of the unamortized balance. Our short-termconvertible security is affected by both the current interest-rate environment and the price of the underlying common stock. For the year ended September 30, 2003 our convertible debt, on September 27, 2002an if-converted basis, was not dilutive and, as a result, had no impact on our net income per share (assuming dilution). In future periods, the debt may be converted, or the if-converted method may be dilutive and net income per share (assuming dilution) would be reduced. Our long-term debt consists of the
current portion$230 million of this loan. In addition, because we refinanced the note
payable to Conexant for the acquisition4.75 percent unsecured convertible subordinated notes due November 2007 and $45 million of the Mexicali Operations and our loan
facility with Conexant, the principal amount of $180 million was classified as
long-term debt on September 27, 2002.15 percent unsecured convertible senior subordinated notes due June 2005. We do not believe that we have significant cash flow exposure on our short-termlong-term debt.
Based on our overall evaluation of our market risk exposures from all of our financial instruments at September 30, 2003 a near-term change in market rates would not materially affect our consolidated financial position, results of operations or long-term debt.
36
Skyworks Solutions, Inc. and Subsidiaries
cash flows.
ITEM 88. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company for the fiscal year ended September 30, 20022003 are included herewith:
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders
Skyworks Solutions, Inc.:
We have audited the accompanying consolidated balance sheetsheets of Skyworks Solutions, Inc. and subsidiaries (the “Company”) as of September 30, 2003 and 2002 and the related consolidated statementstatements of operations, stockholders'stockholders’ equity and cash flows for each of the yearyears then ended. We haveOur audits also auditedincluded the financial statement schedule listed in the Index at Item 15 for the yearyears ended September 30, 2003 and 2002. These consolidated financial statements and financial statement schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Skyworks Solutions, Inc. and subsidiaries as of September 30, 2003 and 2002, and the results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule for the years ended September 30, 2003 and 2002, 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.
As discussed in Note 6 to the consolidated financial statements, effective October 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
November 12, 2003, except for the third paragraph of Note 14, as to which the date is December 4, 2003
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders
Skyworks Solutions, Inc.:
We have audited the accompanying consolidated statements of operations, stockholders’ equity (formerly Conexant’s net investment and comprehensive income), and cash flows of Skyworks Solutions, Inc. and subsidiaries (formerly the Washington Business and the Mexicali Operations of Conexant Systems, Inc.) for the year ended September 30, 2001. Our audit also included the financial statement schedule listed in the Index at Item 15 for the year ended September 30, 2001. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statements schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Skyworks Solutions,
Inc. and subsidiaries at September 30, 2002, and the results of their operations
and their cash flows for the year ended September 30, 2002 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule for the year ended
September 30, 2002, 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.
KPMG LLP
Boston, Massachusetts
November 15, 2002
38
Skyworks Solutions, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors and Stockholders
Skyworks Solutions, Inc.:
We have audited the accompanying consolidated balance sheet of Skyworks
Solutions, Inc. and subsidiaries (formerly the combined balance sheet of the
Washington Business and the Mexicali Operations of Conexant Systems, Inc.) as of
September 30, 2001, and the related consolidated statements of operations,
stockholders' equity (formerly Conexant's net investment and comprehensive
income), and cash flows for the years ended September 30, 2000 and 2001. Our
audits also included the financial statement schedule listed in the Index at
Item 15 for the years ended September 30, 2000 and 2001. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statements schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes addressing the accounting principles used and
significant estimates made by the management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial positionresults of operations and cash flows for Skyworks Solutions, Inc. and subsidiaries (formerly the Washington Business and the Mexicali Operations of Conexant Systems, Inc.) at September 30, 2001, and the results of their
operations and their cash flows for the yearsyear ended September 30, 2000 and 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such 2001 financial statement schedule when considered in relation to the basic 2001 financial statements taken as a whole presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 14, 2002
39
Skyworks Solutions, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In
(In thousands, except per share amounts)
SEPTEMBER 30,
ASSETS 2002 2001
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 53,358 $ 1,998
Receivables, net of allowance for doubtful accounts of
$1,324 and $3,206 .......................................................... 94,425 40,754
Inventories ................................................................... 55,643 37,383
Other current assets .......................................................... 23,970 3,225
----------- -----------
Total current assets .................................................. 227,396 83,360
Property, plant and equipment, less accumulated depreciation and amortization
of $305,709 and $284,879 ..................................................... 143,773 169,547
Goodwill and intangible assets, less accumulated amortization of $915 and $20,594 940,686 57,606
Deferred tax asset .............................................................. 22,487 --
Other assets .................................................................... 12,570 3,774
----------- -----------
Total assets .......................................................... $ 1,346,912 $ 314,287
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt .......................................... $ 129 $ --
Accounts payable .............................................................. 45,350 2,653
Accrued compensation and benefits ............................................. 17,585 12,363
Other current liabilities ..................................................... 84,563 7,804
----------- -----------
Total current liabilities ............................................. 147,627 22,820
Long-term debt, less current maturities ......................................... 180,039 --
Long-term liabilities ........................................................... 4,270 3,806
----------- -----------
Total liabilities ..................................................... 331,936 26,626
Commitments and contingencies ................................................... -- --
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: 25,000 authorized; no shares issued .............. -- --
Common stock, $0.25 par value: 525,000 shares authorized; 137,589 shares issued
and outstanding at September 30, 2002......................................... 34,397 --
Additional paid-in capital ...................................................... 1,150,856 --
Accumulated deficit ............................................................. (170,193) --
Unearned compensation, net of accumulated amortization of $53 ................... (84) --
Conexant's net investment ....................................................... -- 287,661
----------- -----------
Total stockholders' equity ............................................ 1,014,976 287,661
----------- -----------
Total liabilities and stockholders' equity ............................ $ 1,346,912 $ 314,287
=========== ===========
| ASSETS | September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 161,506 | $ | 53,358 | ||||
| Short-term investments | 3,988 | -- | ||||||
| Restricted cash | 5,312 | -- | ||||||
| Receivables, net of allowance for doubtful accounts of | ||||||||
| $1,979 and $1,324, respectively | 144,267 | 94,425 | ||||||
| Inventories | 58,168 | 55,643 | ||||||
| Other current assets | 12,854 | 23,970 | ||||||
| Total current assets | 386,095 | 227,396 | ||||||
| Property, plant and equipment, less accumulated depreciation and amortization of | ||||||||
| $243,797 and $202,436, respectively | 121,556 | 143,773 | ||||||
| Property held for sale | 6,209 | -- | ||||||
| Goodwill | 505,514 | 905,219 | ||||||
| Intangible assets, less accumulated amortization of $4,460 and $915, respectively | 22,181 | 35,467 | ||||||
| Deferred tax asset | 22,766 | 22,487 | ||||||
| Other assets | 26,347 | 12,570 | ||||||
| Total assets | $ | 1,090,668 | $ | 1,346,912 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current maturities of long-term debt | $ | 29 | $ | 129 | ||||
| Short-term debt | 41,652 | -- | ||||||
| Accounts payable | 50,369 | 45,350 | ||||||
| Accrued compensation and benefits | 16,963 | 17,585 | ||||||
| Other current liabilities | 27,803 | 84,563 | ||||||
| Total current liabilities | 136,816 | 147,627 | ||||||
| Long-term debt, less current maturities | 275,000 | 180,039 | ||||||
| Other long-term liabilities | 5,677 | 4,270 | ||||||
| Total liabilities | 417,493 | 331,936 | ||||||
| Commitments and contingencies | -- | -- | ||||||
| Stockholders' equity: | ||||||||
| Preferred stock, no par value: 25,000 authorized, no shares issued | -- | -- | ||||||
| Common stock, $0.25 par value: 525,000 shares authorized; 148,604 and 137,589 | ||||||||
| shares issued and outstanding, respectively | 37,151 | 34,397 | ||||||
| Additional paid-in capital | 1,258,265 | 1,150,856 | ||||||
| Accumulated deficit | (621,609 | ) | (170,193 | ) | ||||
| Accumulated comprehensive loss | (632 | ) | -- | |||||
| Deferred compensation, net of accumulated amortization of $137 and $53, respectively | -- | (84 | ) | |||||
| Total stockholders' equity | 673,175 | 1,014,976 | ||||||
| Total liabilities and stockholders' equity | $ | 1,090,668 | $ | 1,346,912 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
40
Skyworks Solutions, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
(In thousands, except per share amounts)
YEARS ENDED SEPTEMBER 30,
2002 2001 2000
--------- --------- ---------
Net revenues:
Third parties ....................................... $ 418,344 $ 215,502 $ 312,983
Conexant ............................................ 39,425 44,949 65,433
--------- --------- ---------
Total net revenues .......................... 457,769 260,451 378,416
--------- --------- ---------
Cost of goods sold:
Third parties ....................................... 294,149 268,749 207,450
Conexant ............................................ 37,459 42,754 62,720
--------- --------- ---------
Total cost of goods sold .................... 331,608 311,503 270,170
--------- --------- ---------
Gross margin .......................................... 126,161 (51,052) 108,246
Operating expenses:
Research and development ............................ 132,603 111,053 91,616
Selling, general and administrative ................. 50,178 51,267 52,422
Amortization of intangible assets ................... 12,929 15,267 5,327
Purchased in-process research and development ....... 65,500 -- 24,362
Special charges ..................................... 116,321 88,876 --
--------- --------- ---------
Total operating expenses .................... 377,531 266,463 173,727
--------- --------- ---------
Operating loss ........................................ (251,370) (317,515) (65,481)
Interest expense ...................................... (4,227) -- --
Other income (expense), net ........................... (56) 210 142
--------- --------- ---------
Loss before income taxes .............................. (255,653) (317,305) (65,339)
Provision (benefit) for income taxes .................. (19,589) 1,619 1,140
--------- --------- ---------
Net loss .............................................. $(236,064) $(318,924) $ (66,479)
========= ========= =========
Pro forma net loss per share, basic and diluted
(unaudited) (1) ....................................... $ (1.72)
=========
Pro forma number of weighted-average shares used in per
share computation (unaudited) (1) ..................... 137,416
=========
| Years Ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||||||
| Net revenues | $ | 617,789 | $ | 457,769 | $ | 260,451 | |||||
| Cost of goods sold | 380,465 | 331,608 | 311,503 | ||||||||
| Gross profit (loss) | 237,324 | 126,161 | (51,052 | ) | |||||||
| Operating expenses: | |||||||||||
| Research and development | 151,762 | 132,603 | 111,053 | ||||||||
| Selling, general and administrative | 80,222 | 50,178 | 51,267 | ||||||||
| Amortization of intangible assets | 4,386 | 12,929 | 15,267 | ||||||||
| Purchased in-process research and development | -- | 65,500 | -- | ||||||||
| Special charges | 34,493 | 116,321 | 88,876 | ||||||||
| Total operating expenses | 270,863 | 377,531 | 266,463 | ||||||||
| Operating loss | (33,539 | ) | (251,370 | ) | (317,515 | ) | |||||
| Interest expense | (21,403 | ) | (4,227 | ) | -- | ||||||
| Other income (expense), net | 1,317 | (56 | ) | 210 | |||||||
| Loss before income taxes and cumulative effect of change in accounting principle | (53,625 | ) | (255,653 | ) | (317,305 | ) | |||||
| Provision (benefit) for income taxes | 652 | (19,589 | ) | 1,619 | |||||||
| Loss before cumulative effect of change in accounting principle | (54,277 | ) | (236,064 | ) | (318,924 | ) | |||||
| Cumulative effect of change in accounting principle, net of tax | (397,139 | ) | -- | -- | |||||||
| Net loss | $ | (451,416 | ) | $ | (236,064 | ) | $ | (318,924 | ) | ||
| Per share information: | |||||||||||
| Loss before cumulative effect of change in accounting principle, basic and diluted (1) | $ | (0.39 | ) | $ | (1.72 | ) | |||||
| Cumulative effect of change in accounting principle, net of tax, basic and diluted (1) | (2.85 | ) | -- | ||||||||
| Net loss, basic and diluted (1) | $ | (3.24 | ) | $ | (1.72 | ) | |||||
| Number of weighted-average shares used in per share computations, basic and diluted (1) | 139,376 | 137,416 | |||||||||
(1) SeeNote 2 to the consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements.
41
Skyworks Solutions, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY
(In
(In thousands)
| Common stock | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Par value | Additional Paid-in Capital | Conexant's Net Investment | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Unearned Compensation | |||||||||||
| Balance at September 30, 2000 | -- | -- | -- | 466,468 | -- | (52 | ) | -- | |||||||||
| Net loss | -- | -- | -- | (318,924 | ) | -- | -- | -- | |||||||||
| Foreign currency translation adjustment | -- | -- | -- | -- | -- | (232 | ) | -- | |||||||||
| Contribution of additional | |||||||||||||||||
| assets related to business | -- | -- | -- | 2,058 | -- | -- | -- | ||||||||||
| acquired | |||||||||||||||||
| Net transfers from Conexant | -- | -- | -- | 138,343 | -- | -- | -- | ||||||||||
| Balance at September 30, 2001 | -- | -- | -- | 287,945 | -- | (284 | ) | -- | |||||||||
| Net loss | -- | -- | -- | (66,280 | ) | (170,193 | ) | -- | -- | ||||||||
| Foreign currency translation | |||||||||||||||||
| adjustment | -- | -- | -- | -- | -- | 409 | -- | ||||||||||
| Net transfers from Conexant | -- | -- | -- | 50,404 | -- | -- | -- | ||||||||||
| Dividend (1) | -- | -- | -- | (204,716 | ) | -- | -- | -- | |||||||||
| Recapitalization as a result of purchase accounting under a reverse acquisition | 137,368 | 34,342 | 1,149,965 | (67,353 | ) | -- | (125 | ) | (137 | ) | |||||||
| Issuance of common shares for | |||||||||||||||||
| purchase plans, 401k and stock | |||||||||||||||||
| options | 221 | 55 | 861 | -- | -- | -- | -- | ||||||||||
| Amortization of unearned compensation | -- | -- | -- | -- | -- | -- | 53 | ||||||||||
| Compensation expense | -- | -- | 30 | -- | -- | -- | -- | ||||||||||
| Balance at September 30, 2002 | 137,589 | $34,397 | $ 1,150,856 | $ -- | $(170,193 | ) | $ -- | $(84 | ) | ||||||||
| Net loss | -- | -- | -- | -- | (451,416 | ) | -- | -- | |||||||||
| Issuance of common shares in offering, net of expenses | 9,200 | 2,300 | 99,888 | -- | -- | -- | -- | ||||||||||
| Issuance of common shares for | |||||||||||||||||
| purchase plans, 401k and stock | |||||||||||||||||
| options | 1,769 | 442 | 8,607 | -- | -- | -- | -- | ||||||||||
| Amortization of unearned compensation | -- | -- | -- | -- | -- | -- | 84 | ||||||||||
| Adjustment to recapitalization | |||||||||||||||||
| as a result of purchase | |||||||||||||||||
| accounting under a reverse | |||||||||||||||||
| acquisition (2) | -- | -- | (1,543 | ) | -- | -- | -- | -- | |||||||||
| Minimum pension liability adjustment | -- | -- | -- | -- | -- | (632 | ) | -- | |||||||||
| Issuance of common shares in | |||||||||||||||||
| trademark settlement | 46 | 12 | 457 | -- | -- | -- | -- | ||||||||||
| Balance at September 30, 2003 | 148,604 | $37,151 | $ 1,258,265 | $ -- | $(621,609 | ) | $ (632 | ) | $ -- | ||||||||
| (1) |
The dividend to Conexant represents the payment for the Mexicali operations ($150 million), the net assets retained by Conexant in connection with the spin-off, primarily accounts receivable net of accounts payable, and the assumption of certain Conexant liabilities by the Company.
| (2) | Represents an adjustment to recapitalization as a result of purchase accounting under a reverse acquisition, as reported in fiscal 2002, based on final valuations derived in fiscal 2003. |
The accompanying notes are an integral part of these consolidated financial statements.
42
Skyworks Solutions, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
(In thousands)
YEARS ENDED SEPTEMBER 30,
2002 2001 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $ (236,064) $ (318,924) $ (66,479)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation .......................................... 47,695 58,708 61,710
Amortization of intangible assets ..................... 12,878 15,267 5,327
Amortization of deferred compensation ................. 53 -- --
Contribution of common shares to Savings and
Retirement Plan ...................................... 874 -- --
Compensation expense .................................. 30 -- --
Deferred income taxes ................................. (23,117) -- --
Provision for (recoveries of) losses on accounts
Receivable ........................................... (1,178) (468) 3,538
In-process research and development charge ............ 65,500 -- 24,362
Inventory provisions .................................. 2,704 60,978 3,132
Asset impairments ..................................... 111,817 86,209 --
Loss on sale of assets ................................ 209 80 4
Changes in assets and liabilities net of acquisition:
Receivables ........................................... (84,924) 27,276 (39,846)
Inventories ........................................... (4,413) (8,378) (65,150)
Accounts payable ...................................... 36,635 (2,547) 1,961
Accrued expenses and other current liabilities ........ (19,471) (6,003) 14,210
Other ................................................. (8,322) (1,604) 3,401
----------- ----------- -----------
Net cash used in operating activities ............... (99,094) (89,406) (53,830)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ....................................... (29,412) (51,118) (100,424)
Cash and cash equivalents of acquired business ............. 67,102 -- 7,655
Sale of short-term investments ............................. 35,422 -- --
Dividend to Conexant ....................................... (3,070) -- --
----------- ----------- -----------
Net cash provided by (used in) investing activities . 70,042 (51,118) (92,769)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transfers from Conexant ................................ 50,404 138,343 148,706
Short-term note to Conexant ................................ 30,000 -- --
Payments on notes payable .................................. (34) -- --
Exercise of stock options .................................. 42 -- --
----------- ----------- -----------
Net cash provided by financing activities ............ 80,412 138,343 148,706
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ....... 51,360 (2,181) 2,107
Cash and cash equivalents at beginning of period ........... 1,998 4,179 2,072
----------- ----------- -----------
Cash and cash equivalents at end of period ................. $ 53,358 $ 1,998 $ 4,179
=========== =========== ===========
Supplemental disclosure of non-cash activities:
Acquisition of Alpha Industries, Inc. ...................... $ 1,183,105 $ -- $ --
=========== =========== ===========
Dividend to Conexant ....................................... $ 201,646 $ -- $ --
=========== =========== ===========
Supplemental cash flow disclosures:
Taxes paid ................................................. $ 832 $ -- $ --
=========== =========== ===========
Interest paid .............................................. $ 323 $ -- $ --
=========== =========== ===========
| Years Ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (451,416 | ) | $ | (236,064 | ) | $ | (318,924 | ) | ||
| Adjustments to reconcile net loss to net cash used in | |||||||||||
| operating activities: | |||||||||||
| Depreciation | 36,941 | 47,695 | 58,708 | ||||||||
| Amortization | 4,386 | 12,931 | 15,267 | ||||||||
| Amortization of deferred financing costs | 2,123 | -- | -- | ||||||||
| Contribution of common shares to Savings and Retirement Plan | 7,482 | 874 | -- | ||||||||
| Gain on sales of assets | 1,802 | 209 | 80 | ||||||||
| Deferred income taxes | 351 | (23,117 | ) | -- | |||||||
| Purchased in-process research and development | -- | 65,500 | -- | ||||||||
| Asset impairments | 425,407 | 111,817 | 86,209 | ||||||||
| Provision for losses (recoveries) on accounts receivable | 1,156 | (512 | ) | (468 | ) | ||||||
| Inventory provisions | 9,577 | 6,225 | 60,978 | ||||||||
| Changes in assets and liabilities, net of acquisition: | |||||||||||
| Receivables | (50,998 | ) | (85,590 | ) | 27,276 | ||||||
| Inventories | (12,102 | ) | (7,934 | ) | (8,378 | ) | |||||
| Other assets | 6,369 | (8,292 | ) | (1,604 | ) | ||||||
| Accounts payable | 5,019 | 36,635 | (2,547 | ) | |||||||
| Other liabilities | (58,149 | ) | (19,471 | ) | (6,003 | ) | |||||
| Net cash provided by (used in) operating activities | (72,052 | ) | (99,094 | ) | (89,406 | ) | |||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (40,294 | ) | (29,412 | ) | (51,118 | ) | |||||
| Cash, cash equivalents and short-term investments of acquired | |||||||||||
| business | -- | 67,102 | -- | ||||||||
| Sale of short-term investments | -- | 35,422 | -- | ||||||||
| Purchase of short-term investments | (3,988 | ) | -- | -- | |||||||
| Dividend to Conexant | -- | (3,070 | ) | -- | |||||||
| Net cash provided by (used in) investing activities | (44,282 | ) | 70,042 | (51,118 | ) | ||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from unsecured notes offering | 230,000 | -- | -- | ||||||||
| Net proceeds from common stock public offering | 102,188 | -- | -- | ||||||||
| Deferred financing costs | (10,474 | ) | -- | -- | |||||||
| Restricted cash | (5,312 | ) | -- | -- | |||||||
| Net transfers from Conexant | -- | 50,404 | 138,343 | ||||||||
| Proceeds from short-term debt | 41,652 | 30,000 | -- | ||||||||
| Payments on long-term debt | (135,139 | ) | (34 | ) | -- | ||||||
| Exercise of stock options | 1,567 | 42 | -- | ||||||||
| Net cash provided by (used in) financing activities | 224,482 | 80,412 | 138,343 | ||||||||
| Net increase (decrease) in cash and cash equivalents | 108,148 | 51,360 | (2,181 | ) | |||||||
| Cash and cash equivalents at beginning of period | 53,358 | 1,998 | 4,179 | ||||||||
| Cash and cash equivalents at end of period | $ | 161,506 | $ | 53,358 | $ | 1,998 | |||||
| Supplemental cash flow disclosures: | |||||||||||
| Taxes paid | $ | 517 | $ | 832 | $ | -- | |||||
| Interest paid | $ | 21,061 | $ | 323 | $ | -- | |||||
| Supplemental disclosure of non-cash activities: | |||||||||||
| Acquisition of Alpha Industries, Inc. | $ | -- | $ | 1,183,105 | $ | -- | |||||
| Dividend to Conexant | $ | -- | $ | 201,646 | $ | ||||||
| Conexant debt refinancing | $ | 45,000 | $ | -- | $ | -- | |||||
| Stock issued for trademark settlement | $ | 469 | $ | -- | $ | -- | |||||
The accompanying notes are an integral part of these consolidated financial statements.
43
Skyworks Solutions, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Skyworks Solutions, Inc. (“Skyworks” or the “Company”) is a leading wireless semiconductor company focused exclusively on radio frequency (“RF”) and complete cellular system solutions for mobile communications applications. The Company offers front-end modules, RF subsystems and cellular systems to leading wireless handset and infrastructure customers.
On June 25, 2002, pursuant to an Agreement and Plan of Reorganization, dated as of December 16, 2001, as amended as of April 12, 2002, by and among Alpha Industries, Inc. ("Alpha"(“Alpha”), Conexant Systems, Inc. ("Conexant"(“Conexant”) and Washington Sub, Inc. ("Washington"(“Washington”), a wholly owned subsidiary of Conexant entered into a definitive agreement providing for
the combination of Conexant's wireless business with Alpha. Under the
terms of the agreement,to which Conexant would spinspun off its wireless communications business, into
Washington, including its gallium arsenide wafer fabrication facility located in Newbury Park, California, but excluding certain assets and liabilities, to be followed immediately by a merger (the "Merger") of this
wireless businessWashington merged with and into Alpha with Alpha as the surviving entity in the
merger. This merger was completed on June 25, 2002.(the “Merger”). Following the merger,Merger, Alpha changed its corporate name to Skyworks Solutions, Inc (the
"Company", "Skyworks").
Inc.
Immediately following completion of the Merger, the Company purchased Conexant'sConexant’s semiconductor assembly, module manufacturing and test facility located in Mexicali, Mexico, and certain related operations ("(“Mexicali Operations"Operations”) for $150 million. For financial accounting purposes, the sale of the Mexicali Operations by Conexant to Skyworks Solutions was treated as if Conexant had contributed the Mexicali Operations to Washington as part of the spin-off, and the $150 million purchase price was treated as a return of capital to Conexant. The accompanying consolidated financial
statements include the assets, liabilities, operating results and cash
flows of the Washington business and the Mexicali Operations for all
periods presented, and the results of operations of Alpha from June 25,
2002, the date of acquisition. For purposes of these combined financial statements, the Washington business and the Mexicali Operations are collectively referred to as Washington/Mexicali. References to the “Company” refer to Washington/Mexicali for all periods prior to June 26, 2002, and to the combined company following the Merger.
The Merger has beenwas accounted for as a reverse acquisition whereby Washington was treated as the acquirer and Alpha as the acquiree, primarily because Conexant shareholders owned a majority, approximately 67 percent, of the Company upon completion of the merger.Merger. Under a reverse acquisition, the purchase price of Alpha was based upon the fair market value of Alpha common stock for a reasonable period of time before and after the announcement date of the Merger and the fair value of Alpha stock options. The purchase price of Alpha was allocated to the assets acquired and liabilities assumed by Washington, as the acquiring company for accounting purposes, based upon their estimated fair market value at the acquisition date. Because the Merger was accounted for as a purchase
of Alpha, the historical financial statements of Washington/ Mexicali
became the historical financial statements of the Company after the
Merger. Since the historical financial statements of the Company after the Merger do not include the historical financial results of Alpha for periods prior to June 25, 2002, the financial statements may not be indicative of future results of operations orand are not indicative of the historical results that would have resulted if the Merger had occurred at the beginning of a historical financial period.
The Company is a leading wireless semiconductor company focused on
providing front-end modules, radio frequency (RF) subsystems,
semiconductor components and complete system solutions to wireless handset
and infrastructure customers worldwide. The Company offers a comprehensive
family of components and RF subsystems, and also provides complete
antenna-to-microphone semiconductor solutions that support advanced 2.5G
and 3G services.
Basis of Presentation:
The combined financial statements prior to the Merger were prepared using Conexant'sConexant’s historical basis in the assets and liabilities and the historical operating results of Washington/Mexicali during each respective period. The CompanyManagement believes the assumptions underlying the financial statements are reasonable. However, we cannot assure youthere can be no assurance that the financial information included herein reflects the combined assets, liabilities, operating results and cash flows of the Company in the future or what they would have been had Washington/Mexicali been a separate stand-alone entity and independent of Conexant during the periods presented.
Under purchase accounting, the operating results of the acquirer
(Washington/Mexicali) are included for all periods being presented,
whereas the operating results of the acquiree (Alpha) are included only
after the date of acquisition (June 25, 2002) through the end of the
period. Therefore, the historical financial information included herein
does not necessarily reflect the combined assets, liabilities, operating
results and cash flows of the Company in the future.
Conexant used a centralized approach to cash management and the financing of its operations. Cash deposits from Washington/Mexicali were transferred to Conexant on a regular basis and were netted against Conexant'sConexant’s net
44
Skyworks Solutions, Inc. and Subsidiaries investment. As a result, none of Conexant'sConexant’s cash, cash equivalents, marketable securities or debt was allocated to Washington/Mexicali in the financial statements. Cash and cash equivalents in the financial statements, prior to the acquisition, represented amounts held by certain foreign operations of Washington/Mexicali. Changes in equity represented funding from Conexant for working capital and capital expenditure requirements after giving effect to Washington/ Mexicali'sMexicali’s transfers to and from Conexant for its cash flows from operations through June 25, 2002.
Historically, Conexant provided financing for Washington/Mexicali and incurred debt at the parent level. The financial statements for the periods prior to June 25, 2002 of Washington/Mexicali diddo not include an allocation of Conexant'sConexant’s debt or the related interest expense. Therefore, the financial statements do not necessarily reflect the financial position and results of operations of Washington/Mexicali had it been an independent company as of the dates, and for the periods, presented.
The financial statements for the periods prior to the Merger also include allocations of certain Conexant operating expenses for research and development, legal, accounting, treasury, human resources, real estate, information systems, distribution, customer service, sales, marketing, engineering and other corporate services provided by Conexant, including executive salaries and other costs. The operating expense allocations have been determined on bases that management considered to be reasonable reflections of the utilization of services provided to, or the benefit received by, Washington/Mexicali. Management believes that the expenses allocated to Washington/Mexicali are representative of the operating expenses that would have been incurred had Washington/Mexicali operated as an independent company. AfterSince the spin-off anddate of the Merger, the Company ishas been performing these functions using its own resources or purchased services, including certain services obtained from Conexant pursuant to a transition services agreement, most of which expiresexpired on December 31, 2002 unless extended by mutual
agreement.
2002. The Company expects to transition the remaining services from Conexant to third party providers before the end of fiscal 2004.
NOTE 22. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
| The financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. |
Fiscal Year:
The Company's fiscal year ends on the Friday closest to September 30.
Fiscal years 2002, 2001 and 2000 each comprised 52 weeks and ended on
September 27, September 28 and September 29, respectively. For
convenience, the consolidated financial statements have been shown as
ending on the last day of the calendar month.
| The Company’s fiscal year ends on the Friday closest to September 30. Fiscal 2003 consisted of 53 weeks and fiscal years 2002 and 2001 each consisted of 52 weeks. Fiscal years 2003, 2002 and 2001 ended on October 3, 2003, September 27, 2002 and September 28, 2001, respectively. For convenience, the consolidated financial statements have been shown as ending on the last day of the calendar month. |
Use of Estimates:
| The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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. |
| The combined financial statements have been prepared using Conexant’s historical basis in the assets and liabilities and the historical operating results of Washington/Mexicali during each respective period. The Company believes the assumptions underlying the financial statements are reasonable. However, the Company cannot assure you that the financial information included herein reflects the combined assets, liabilities, operating results and cash flows of the Company in the future or what they would have been had Washington/Mexicali been a separate stand-alone entity and independent of Conexant during the periods presented. |
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 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. |
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. |
Short-term Investments:
| The Company’s short-term investments are classified as held-to-maturity. These investments consist of commercial paper with original maturities of more than 90 days but less than twelve months. Such short-term investments are carried at amortized cost, which approximates fair value, due to the short period of time to maturity. Gains and losses are included in investment income in the period they are realized. |
Restricted Cash:
| Restricted cash is 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, National Association providing for a $50 million credit facility (“Facility Agreement “) secured by the purchased accounts receivable. SeeNote 8. |
Accounts Receivable:
| Accounts receivable consist of amounts due from normal business activities. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make future payments, additional allowances may be required. |
Inventories:
| Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. The Company provides for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions. The recoverability of inventories is assessed through an on-going review of inventory levels in relation to sales backlog and forecasts, product marketing plans and product life cycles. When the inventory on hand exceeds the foreseeable demand (generally in excess of six months), the value of such inventory that is not expected to be sold at the time of the review is written down. The amount of the write-down is the excess of historical cost over estimated realizable value (generally zero). 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. |
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 for financial reporting and accelerated methods for tax purposes. Significant renewals and betterments are capitalized and replaced units are written off. Maintenance and repairs, as well as renewals of a minor amount, are expensed as incurred. |
| Estimated useful lives used for depreciation purposes are 5 to 30 years for buildings and improvements and 3 to 10 years for machinery and equipment. Leasehold improvements are depreciated over the lesser of the economic life or the life of the associated lease. |
Property Held for Sale:
| Property held for sale at September 30, 2003 relates to land and buildings no longer in use and is recorded at estimated fair value less estimated selling costs. The Company is actively marketing the property held for sale. |
Valuation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to makelong-lived assets:
| Carrying values for long-lived assets and definitive lived intangible assets, excluding goodwill, are reviewed for possible impairment as circumstances warrant in connections with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which was adopted on October 1, 2002. Impairment reviews are conducted at the judgment of management whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance. 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, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined using discounted cash flows. |
Goodwill and assumptions that affect the
amounts reported in the combined financial statements and accompanying
notes. Among the significant estimates affecting the financial statements
are those related to inventories, long-lived assets and income taxes. On
an ongoing basis, management reviews its estimates based upon currently
available information. Actual results could differ materially from those
estimates.
The combined financial statements have been prepared using Conexant's
historical basis in the assets and liabilities and the historical
operating results of Washington/Mexicali during each respective period.
The Company believes the assumptions underlying the financial statements
are reasonable. However, we cannot assure you that the financial
information included herein reflects the combined assets, liabilities,
operating results and cash flows of the Company in the future or what they
would have been had Washington/Mexicali been a separate stand-alone entity
and independent of Conexant during the periods presented.
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 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 non-distributor customers is recorded
based on historical experience or specific identification of an event
necessitating a reserve. Development revenue is recognized when services
are performed and was not significant for any of the periods presented.
45
Skyworks Solutions, Inc. and Subsidiaries
Intangible Assets:
| Goodwill and intangible assets are principally the result of the Merger with Washington/Mexicali completed on June 25, 2002. The Company adopted SFAS No. 142, “Goodwill and Other Intangibles,” on October 1, 2002 and performed a transitional impairment test for goodwill in fiscal 2003. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets that have indefinite useful lives are not amortized into results of operations, but instead are evaluated at least annually for impairment and written down when the recorded value exceeds the estimated fair value. 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. 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. As part of the first step, the Company determined that it has one reporting unit for purposes of performing the fair-value based test of goodwill. This reporting unit is consistent with the Company’s single operating segment, which management determined is appropriate under the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company completed step one and determined that its goodwill and unamortized intangible assets were impaired. Step two of the analysis compares the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. The Company completed step two and determined that the carrying amount of its goodwill was $397.1 million greater than its implied fair value. This transitional impairment charge was recorded as a cumulative effect of a change in accounting principle in fiscal 2003. 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 2003 and determined that as of July 1, 2003, its goodwill was not further 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. |
Income Taxes:
| The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. |
Research and Development Expenditures:
Research and development costs are expensed as incurred.
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.
Bad Debt:
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make future
payments, additional allowances may be required.
Inventories:
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. The Company provides for estimated
obsolescence or unmarketable inventory based upon assumptions about future
demand and market conditions. The recoverability of inventories is
assessed through an on-going review of inventory levels in relation to
sales backlog and forecasts, product marketing plans and product life
cycles. When the inventory on hand exceeds the foreseeable demand
(generally over six months), the value of such inventory that is not
expected to be sold at the time of the review is written down. The amount
of the write-down is the excess of historical cost over estimated
realizable value (generally zero). 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.
Property, Plant and Equipment:
Property, plant and equipment are carried at cost. Depreciation is
calculated using the straight-line method for financial reporting and
accelerated methods for tax purposes. Significant renewals and betterments
are capitalized and replaced units are 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 life of the
associated lease.
Goodwill and Intangible Assets:
Goodwill and intangible assets are principally the result of the Merger
with Washington/Mexicali completed on June 25, 2002 and a business
acquisition completed in fiscal 2000. The Company adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations as of July 1, 2001. Goodwill and intangible assets determined
to have an indefinite useful life acquired in a purchase business
combination completed after June 30, 2001, but before SFAS No. 142,
Goodwill and Other Intangible Assets, is adopted in full, are not
amortized. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 continued to be amortized.
Business acquisitions are accounted for by assigning the purchase price to
tangible and intangible assets and liabilities, including purchased
in-process research and development (IPRD) projects, which have not yet
reached technological feasibility and have no alternative future use.
Assets acquired and liabilities assumed are recorded at their estimated
fair values; the excess of the purchase price over the net assets acquired
is recorded as goodwill. The value of IPRD is immediately charged to
expense upon completion of the acquisition. Developed technology, customer
relationships and other intangibles are amortized on a straight-line basis
over their estimated useful lives (principally 10 years).
Income Taxes:
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
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.
Concentrations:
46
Skyworks Solutions, Inc. and Subsidiaries
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. The following customers accounted for 10% or
more of trade receivables from customers other than Conexant:
| Research and development costs are expensed as incurred. |
Product Warranties:
| Warranties are offered on the sale of certain products and an accrual is recorded for estimated claims. The changes in the warranty reserve are as follows: |
| Warranty balance, September 30, | |||
| $ 3,414 | |||
| Additions | 14,000 | ||
| Cash payments and reductions | (4,042 | ) | |
| Warranty balance, September 30, 2002 | 13,372 | ||
| Additions | -- | ||
| Cash payments and reductions | (7,241 | ) | |
| Warranty balance, September 30, 2003 | $ 6,131 | ||
Foreign Currency Translation and Remeasurement:
The foreign operations of the Company are subject to exchange rate
fluctuations and foreign currency transaction costs. The functional
currency for our foreign operations is the U.S. dollar. Inventories,
property, plant and equipment; goodwill and intangible assets; costs of
goods sold; and depreciation and amortization are remeasured from the
foreign currency into U.S. dollars at historical exchange rates; other
accounts are translated at current exchange rates. Gains and losses
resulting from these remeasurements are included in income. Gains and
losses resulting from foreign currency transactions are recognized
currently in income.
| The foreign operations of the Company are subject to exchange rate fluctuations and foreign currency transaction costs. The functional currency for the Company’s foreign operations is the U.S. dollar. Exchange gains and losses resulting from transactions denominated in currencies other than the functional currency are included in the results of operations for the year. Inventories, property, plant and equipment, goodwill and intangible assets, costs of goods sold, and depreciation and amortization are remeasured from the foreign currency into U.S. dollars at historical exchange rates; other accounts are translated at current exchange rates. Gains and losses resulting from these remeasurements are included in results of operations. The Company recorded a gain of $0.4 million related to these remeasurements in fiscal 2003. |
Stock Option Plans:
The Company accounts for its stock-based compensation under the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations and provides disclosure
related to its stock-based compensation under the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation."
| The Company has elected to follow Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for employee stock options rather than the alternative fair value accounting allowed by SFAS No. 123, “Accounting for Stock-Based Compensation.” APB No. 25 provides that compensation expense relative to the Company’s employee stock options is measured based on the intrinsic value of stock options granted and the Company recognizes compensation expense in its statement of operations using the straight-line method over the vesting period for fixed awards. Under SFAS No. 123, the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options. In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results. SFAS No. 148 is effective for financial statements for fiscal years and interim periods ending after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 on December 27, 2002 and continues to follow APB No. 25 in accounting for employee stock options. |
| No stock-based employee compensation cost is reflected in net income, as all options granted under the Company’s stock-based employee compensation plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Prior to the Merger with Alpha Industries, Inc., Conexant’s wireless business had no separate capitalization. Therefore, the Company had no stock-based compensation prior to June 25, 2002. |
| Had compensation cost for the Company’s stock option and stock purchase plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, the Company’s net income (loss) would have been as follows: |
| Years Ended September 30, | |||||
|---|---|---|---|---|---|
| (In thousands, except per share amounts) | 2003 | 2002 | |||
| Reported net loss | $ (451,416 | ) | $ (236,064 | ) | |
| Total stock-based employee compensation expense | |||||
| determined under fair value based method for | |||||
| all awards, net of related tax | |||||
| effects | 4,923 | 285 | |||
| Adjusted net loss | $ (456,339 | ) | $ (236,349 | ) | |
| Per share information: | |||||
| Basic and diluted: | |||||
| Reported net loss | $ (3.24) | $ (1.72 | ) | ||
| Total stock-based employee compensation | |||||
| expense determined under fair value based | |||||
| method for all awards, net of related tax | |||||
| effects | (0.03) | -- | |||
| Adjusted net loss | $ (3.27) | $ (1.72 | ) | ||
| For purposes of pro forma disclosures under SFAS No. 123, the estimated fair value of the options is assumed to be amortized to expense over the options’ vesting period. The fair value of the options granted has been estimated at the date of the grant using the Black-Scholes option pricing model with the following assumptions: |
| 2003 | 2002 | ||||
|---|---|---|---|---|---|
| Expected volatility | 95 | % | 70 | % | |
| Risk free interest rate | 2.5 | % | 2.2 | % | |
| Dividend yield | -- | -- | |||
| Expected option life (years) | 4.5 | 4.5 | |||
| Weighted average fair value of options granted | $ 2.57 | $ 1.87 | |||
| The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require input of highly subjective assumptions, including the expected stock price volatility. Because options held by employees and directors have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reasonable measure of the fair value of these options. |
Earnings Per Share:
47
Skyworks Solutions, Inc. and Subsidiaries
Prior to the Merger with Alpha Industries, Inc., Conexant's wireless
business had no separate capitalization, therefore a calculation cannot
be performed for weighted average shares outstanding to then calculate
earnings per share. Pro forma basic
| Prior to the Merger with Alpha, Conexant’s wireless business had no separate capitalization. Therefore, a calculation cannot be performed for weighted average shares outstanding to then calculate earnings per share. Basic earnings per share is calculated by dividing net income (loss) by the assumed weighted average number of common shares outstanding. Diluted earnings per share includes the dilutive effect of stock options and a stock warrant, using the treasury stock method, and debt securities on an if converted basis, if their effect is dilutive. For the year ended September 30, 2003, debt securities convertible into 31.1 million shares, stock options exercisable into 25.8 million shares and a warrant to purchase 1.0 million shares were outstanding but not included in the computation of diluted earnings per share as the net loss for this period would have made their effect anti-dilutive. For the year ended September 30, 2002, options to purchase 31.3 million shares were outstanding but not included in the computation of diluted earnings per share as the net loss for this period would have made their effect anti-dilutive. |
Pensions and Retiree Medical Benefits:
| In connection with Conexant’s spin-off of its Washington/Mexicali business, Conexant transferred obligations to Washington/Mexicali for its pension plan and retiree benefits. The amounts that were transferred relate to approximately twenty Washington/Mexicali employees that had enrolled in Conexant’s Voluntary Early Retirement Plan (“VERP”) in 1998. The VERP also provides health care benefits to members of the plan. The Company currently does not offer pension plans or retiree benefits to its employees. |
| The costs and obligations of the Company’s pension and retiree medical plans are calculated using many assumptions, the amount of which cannot be completely determined until the benefit payments cease. The most significant assumptions, as presented in Note 12 to the Consolidated Financial Statements, include discount rate, expected return on plan assets and future trends in health care costs. The selection of assumptions is based on historical trends and known economic and market conditions at the time of valuation. Actual results may differ substantially from these assumptions. These differences may significantly impact future pension or retiree medical expenses. |
| Annual pension and retiree medical expense is principally the sum of three components: 1) increase in liability from interest; less 2) expected return on plan assets; and 3) other gains and losses as described below. The expected return on plan assets is calculated by applying an assumed long-term rate of return to the fair value of plan assets. In any given year, actual returns can differ significantly from the expected return. Differences between the actual and expected return on plan assets are combined with gains or losses resulting from the revaluation of plan liabilities. Plan liabilities are revalued annually, based on updated assumptions and information about the individuals covered by the plan. The combined gain or loss is generally expensed evenly over the remaining years that employees are expected to work. |
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 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. Comprehensive loss presented in the combined financial statements of Conexant’s net investment consists of Washington/Mexicali’s net loss and foreign currency translation adjustments prior to the Merger. The foreign currency translation adjustments are not recorded net of any tax effect, as management does not expect to incur any tax liability or benefit related thereto. Accumulated other comprehensive loss, prior to the Merger, is included in Conexant’s net investment in the combined balance sheets. Comprehensive loss, for periods subsequent to the Merger, consists of an adjustment to the Company’s minimum pension liability. |
An analysis of other comprehensive income (loss) by the assumed pro forma weighted average
number of common shares outstanding in fiscal 2002. Pro forma weighted
average number of shares outstanding is calculated assuming the Merger
had been consummated at the beginning of fiscal 2002. Pro forma diluted
earnings per share includes the dilutive effect of stock options, if
their effect is dilutive, using the treasury stock method. Options to
purchase approximately 31.3 million shares were outstanding but not
included in the computation of diluted earnings per share as the net loss
for the fiscal year ended September 30, 2002 would have made their effect
anti-dilutive.
Comprehensive (Loss) Income:
The Company accounts for comprehensive (loss) income in accordance with
the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is a financial statement presentation standard, which requires the
Company to disclose non-owner changes included in equity but not included
in net income or loss. Comprehensive loss presented in the combined
financial statements of Conexant's net investment consists of
Washington/Mexicali's net loss and foreign currency translation
adjustments prior to the Merger. The foreign currency translation
adjustments are not recorded net of any tax effect, as management does not
expect to incur any tax liability or benefit related thereto. Accumulated
other comprehensive loss, prior to the Merger, is included in Conexant's
net investment in the combined balance sheets.
Supplemental Cash Flow Information:
Conexant made all income tax payments, prior to the Merger, on behalf of
the Washington/Mexicali business.
follows (in thousands):
| Foreign Currency Translation | Pension Adjustments | Accumulated Other Comprehensive Income (Loss) | |||||
|---|---|---|---|---|---|---|---|
| Balance as of September 30, 2001 | $ (284 | ) | $ -- | $ (284 | ) | ||
| Change in period | 409 | -- | 409 | ||||
| Balance retained by Conexant | (125 | ) | -- | (125 | ) | ||
| Balance as of September 30, 2002 | -- | -- | -- | ||||
| Change in period | -- | (632 | ) | (632 | ) | ||
| Balance as of September 30, 2003 | $ -- | $ (632 | ) | $ (632 | ) | ||
Reclassifications:
| Certain reclassifications have been made to the prior years’ financial statements to conform to the current year’s presentation. |
Recent Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements No. 141, "Business Combinations" (SFAS No. 141), and No. 142,
"Goodwill and Other Intangibles" (SFAS No. 142). SFAS No. 141 requires the
use of the purchase method of accounting and eliminates the use of the
pooling-of-interest method of accounting for business combinations. SFAS
No. 141 also requires that the Company recognize acquired intangible
assets apart from goodwill if the acquired intangible assets meet certain
criteria. SFAS No. 141 applies to all business combinations initiated
after June 30, 2001 and for purchase business combinations completed on or
after July 1, 2001. The Company has adopted the provisions of SFAS No.
141. Upon adoption of SFAS No. 142, the Company is required to evaluate
its existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in
order to conform
| During fiscal 2003, the Company adopted the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and FIN 46, “Consolidation of Variable Interest Entities” with no material impact to the consolidated financial statements. The disclosure requirements of FIN 45 are addressed in Note 15. |
NOTE 3. BUSINESS COMBINATIONS
Merger with the new classification criteria in SFAS No. 141 for
recognition separate from goodwill. The Company will be required to
reassess the useful lives and residual values of all intangible assets
acquired, and make any necessary amortization period adjustments by the
end of the first interim period after adoption. If an intangible asset is
identified as having an indefinite useful life, the Company will be
required to test the intangible asset for impairment in accordance with
the provisions of SFAS No. 142 within the first interim period. Impairment
is measured as the excess of carrying value over the fair value of an
intangible asset with an indefinite life. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement requires the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting
units and determine the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of October 1, 2002. The Company will
then have up to six months from October 1, 2002 to determine the fair
value of each reporting unit and compare it to the carrying amount of the
reporting unit. To the extent the carrying amount of a reporting unit
exceeds the fair value of the reporting unit, an indication exists that
the reporting unit goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. The second step is
required to be completed as soon as possible, but no later than the end of
the year of adoption. In the second step, the Company must compare the
implied fair value of the reporting unit goodwill with the carrying amount
of the reporting unit goodwill, both of which would be measured as of the
date of adoption. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with SFAS No.
141. The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. Any transitional impairment loss
will be recognized as the cumulative effect of a change in accounting
principle in the Company's statement of operations. The Company may be
required to record a substantial transitional impairment charge as a
result of adopting SFAS No. 142. The carrying value of goodwill and
intangible assets, subject to the transitional impairment test, is
approximately $907.5 million at September 30, 2002. Management is
assessing the impact that adoption of SFAS No. 142 will have on our
financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which supersedes previous guidance on financial accounting and reporting
for the impairment or disposal of long-lived assets and for segments of a
business to be disposed of. Adoption of SFAS 144 is required no later than
the beginning of fiscal 2003. Management does not expect the adoption of
SFAS 144 to have a significant impact on our financial position or results
of operations. However, future impairment reviews may result in charges
against earnings to write down the value of long-lived assets.
In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB Statement
No.'s 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections", effective for fiscal years beginning May 15, 2002 or later.
It rescinds SFAS No. 4, "Reporting Gains and Losses From Extinguishments
of Debt", SFAS No. 64, "Extinguishments of Debt to Satisfy Sinking-Fund
Requirements", and SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers". This Statement also amends SFAS No. 13, "Accounting for Leases"
to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings or describe their applicability under changed conditions.
The Company does not believe the impact of adopting SFAS No. 145 will have
a material impact on its financial statements.
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities". SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of commitment to an exit or
disposal plan. This statement is effective for exit or disposal
48
Skyworks Solutions,Conexant Systems, Inc. and Subsidiaries
activities initiated after December 31, 2002. We are assessing the impact
that adoption of SFAS No. 146 will have on our financial statements.
NOTE 3 BUSINESS COMBINATIONS
MERGER WITH CONEXANT SYSTEMS, INC.'S WIRELESS BUSINESS
On December 16, 2001, Alpha, Conexant and Washington, a wholly owned
subsidiary of Conexant, entered into a definitive agreement providing for
the combination of Conexant's wireless business with Alpha. Under the
terms of the agreement, Conexant would spin off its wireless business into
Washington, including its gallium arsenide wafer fabrication facility
located in Newbury Park, California, but excluding certain assets and
liabilities, to be followed immediately by the Merger of this wireless
business into Alpha with Alpha as the surviving entity in the Merger. The
Merger was completed on June 25, 2002. Following the Merger, Alpha changed
its corporate name to Skyworks Solutions, Inc.
Immediately following completion of the Merger, the Company purchased the
Mexicali Operations for $150 million. For financial accounting purposes,
the sale of the Mexicali Operations by Conexant to Skyworks Solutions was
treated as if Conexant had contributed the Mexicali Operations to
Washington as part of the spin-off, and the $150 million purchase price
was treated as a return of capital to Conexant.
The Merger has been accounted for as a reverse acquisition whereby
Washington was treated as the acquirer and Alpha as the acquiree,
primarily because Conexant shareholders owned a majority, approximately 67
percent, of the Company upon completion of the Merger. Under a reverse
acquisition, the purchase price of Alpha was based upon the fair market
value of Alpha common stock for a reasonable period of time before and
after the announcement date of the merger and the fair value of Alpha
stock options. The purchase price of Alpha was allocated to the assets
acquired and liabilities assumed by Washington, as the acquiring company
for accounting purposes, based upon their estimated fair market value at
the acquisition date. Because the Merger was accounted for as a purchase
of Alpha, the historical financial statements of Washington/Mexicali
became the historical financial statements of the Company after the
merger. Since the historical financial statements of the Company after the
Merger do not include the historical financial results of Alpha for
periods prior to June 25, 2002, the financial statements may not be
indicative of future results of operations or the historical results that
would have resulted if the Merger had occurred at the beginning of a
historical financial period.
In connection with the Merger, the Company identified duplicate facilities
resulting in a write-down of fixed assets with historical carrying values
of $92.4 million to $20.2 million, a reduction in workforce of
approximately 210 employees at a cost of $4.8 million and facility exit or
closing costs of $3.1 million. The effects of these actions are reflected
in the purchase price allocation below.
49
Skyworks Solutions, Inc. and Subsidiaries‘s Wireless Business
| On December 16, 2001, Alpha, Conexant and Washington, a wholly owned subsidiary of Conexant, entered into a definitive agreement providing for the combination of Conexant’s wireless business with Alpha. Under the terms of the agreement, Conexant spun off its wireless business into Washington, including its gallium arsenide wafer fabrication facility located in Newbury Park, California, but excluding certain assets and liabilities, followed immediately by the Merger of this wireless business into Alpha with Alpha as the surviving entity in the Merger. The Merger was completed on June 25, 2002. Following the Merger, Alpha changed its corporate name to Skyworks Solutions, Inc. |
| Immediately following completion of the Merger, the Company purchased the Mexicali Operations for $150 million. For financial accounting purposes, the sale of the Mexicali Operations by Conexant to Skyworks Solutions was treated as if Conexant had contributed the Mexicali Operations to Washington as part of the spin-off, and the $150 million purchase price was treated as a return of capital to Conexant. |
| The Merger was accounted for as a reverse acquisition whereby Washington was treated as the acquirer and Alpha as the acquiree, primarily because Conexant shareholders owned a majority, approximately 67 percent, of the Company upon completion of the Merger. Under a reverse acquisition, the purchase price of Alpha was based upon the fair market value of Alpha common stock for a reasonable period of time before and after the announcement date of the Merger and the fair value of Alpha stock options. The purchase price of Alpha was allocated to the assets acquired and liabilities assumed by Washington, as the acquiring company for accounting purposes, based upon their estimated fair market value at the acquisition date. Because the Merger was accounted for as a purchase of Alpha, the historical financial statements of Washington/Mexicali became the historical financial statements of the Company after the Merger. Since the historical financial statements of the Company after the Merger do not include the historical financial results of Alpha for periods prior to June 25, 2002, the financial statements may not be indicative of future results of operations and are not indicative of the historical results that would have resulted if the Merger had occurred at the beginning of a historical financial period. |
| In connection with the Merger, the Company identified duplicate facilities resulting in a write-down of fixed assets with historical carrying values of $92.4 million to $20.2 million, a reduction in workforce of approximately 210 employees at a cost of $4.8 million and facility exit or closing costs of $3.1 million. The effects of these actions are reflected in the purchase price allocation below. |
The total purchase price was valued at approximately $1.2 billion and is summarized as follows:
| (in thousands) | |||
| Fair market value of Alpha common stock | $1,054,111 | ||
| Fair value of Alpha stock options | 95,388 | ||
| Estimated transaction costs of acquirer | 33,606 | ||
| Total | $1,183,105 | ||
The purchase price was allocated as follows:
| (in thousands) | |||
| Working capital | $ | ||
| Property, plant and equipment | 59,767 | ||
| Amortized intangible assets | 34,082 | ||
| Unamortized intangible assets | 2,300 | ||
| Goodwill | 902,653 | ||
| In-process research and development | 65,500 | ||
| Long-term debt | (73 | ) | |
| Other long-term liabilities | (2,236 | ) | |
| Deferred compensation | 135 | ||
| Total | $ 1,183,105 | ||
| The following unaudited pro forma financial information presents the consolidated operations of the Company as if the June 25, 2002 Merger had occurred as of the beginning of the periods presented. This information gives effect to certain adjustments including increased amortization of intangibles and increased interest expense related to debt issued in conjunction with the Merger. In-process research and development |
| (in thousands, except per share data) | Years Ended September 30, | ||||
|---|---|---|---|---|---|
| 2002 | 2001 | ||||
| Net revenue | $ 543,091 | $ 458,352 | |||
| Net loss | $(301,684 | ) | $(328,981 | ) | |
| Net loss per share (basic and diluted) (1) | $ (2.20 | ) | |||
(1) SeeNote 2 to revision, which is not
expected to be material, based on the final valuation of plant, property
and equipment acquired.
The following unaudited pro forma financial information presents the consolidated operations of the Company as if the June 25, 2002 Merger had
occurred as of the beginning of the periods presented. This information
gives effect to certain adjustments including increased amortization of
intangibles and increased interest expense related to debt issued in
conjunction with the Merger. In-process research and development of $65.5
million and other Merger-related expenses of $28.8 million have been
excluded from the pro forma results as they are non-recurring and not
indicative of normal operating results. This information is provided for
illustrative purposes only, and is not necessarily indicative of the
operating results that would have occurred had the Merger been consummated
at the beginnings of the periods presented, nor is it necessarily
indicative of any future operating results.
financial statements
| In connection with the Merger, $65.5 million was allocated to purchased in-process research and development and expensed immediately upon completion of the acquisition (as a charge not deductible for tax purposes) because the technological feasibility of certain products under development had not been established and no future alternative uses existed. |
| The semiconductor segment was involved in several projects that have been aggregated into the following categories based on the respective technologies: |
| Power Amplifier: Power amplifiers are designed and manufactured for use in different types of wireless handsets. The main performance attributes of these amplifiers are efficiency, power output, operating voltage and distortion. Current research and development is focused on expanding the offering to all types of wireless standards, improving performance by process and circuit improvements and offering a higher level of integration. |
| Control Products: Control products consist of switches and switch filters that are used in wireless applications for signal routing. Most applications are in the handset market enabling multi-mode, multi-band handsets. Current research and development is focused on performance improvement and cost reduction by reducing chip size and increasing functionality. |
| Broadband: The products in this grouping consist of radio frequency (RF) and millimeter wave semiconductors and components designed and manufactured specifically to address the needs of high-speed, wireline and wireless network access. Current and long-term research and development is focused on performance enhancement of speed and bandwidth as well as cost reduction and integration. |
| Silicon Diode: These products use silicon processes to fabricate diodes for use in a variety of RF and wireless applications. Current research and development is focused on reducing the size of the device, improving performance and reducing cost. |
| Ceramics: The ceramics segment was involved in projects that relate to the design and manufacture of ceramic-based components such as resonators and filters for the wireless infrastructure market. Current research and development is focused on performance enhancements through improved formulations and electronic designs. |
| The material risks associated with the successful completion of the in-process technology were associated with our ability to successfully finish the creation of viable prototypes and successful design of the chips, masks and manufacturing processes required. We expected to benefit from the in-process projects as the individual products that contained the in-process technology were put into production and sold to end-users. The release dates for each of the products within the product families were varied. The fair value of the IPR&D was determined using the income approach. Under the income approach, the fair value reflected the present value of the projected cash flows that were expected to be generated by the products incorporating the IPR&D, if successful. The projected cash flows were discounted to approximate fair value. The discount rate applicable to the cash flows of each project reflected the stage of completion and other risks inherent in each project. The weighted average discount rate used in the valuation of IPR&D was 30 |
NOTE 4 SUPPLEMENTAL FINANCIAL STATEMENT DATA4. INVENTORY
Inventories consistedconsist of the following (in thousands):
| September 30, | |||||
|---|---|---|---|---|---|
| 2003 | 2002 | ||||
| Raw materials | $ 8,475 | $13,496 | |||
| Work-in-process | 35,797 | 27,764 | |||
| Finished goods | 13,896 | 14,383 | |||
| $58,168 | $55,643 | ||||
| The assessment of the recoverability of inventories, and the amounts of any write-downs, is based on currently available information and assumptions about future demand and the market conditions. Demand for products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those projected by management. In the event that actual demand is lower than originally projected, additional inventory write-downs may be required. |
| Some or all of the inventories which 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 which have been written-down and are identified as obsolete are generally scrapped. |
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
| September 30, | |||||
|---|---|---|---|---|---|
| 2003 | 2002 | ||||
| Land | $ 9,423 | $ 11,578 | |||
| Land and leasehold improvements | 3,410 | 6,583 | |||
| Buildings | 58,340 | 60,386 | |||
| Machinery and equipment | 249,124 | 250,500 | |||
| Construction in progress | 33,739 | 17,162 | |||
| 354,035 | 346,209 | ||||
| Accumulated depreciation and amortization | (232,480 | ) | (202,436 | ) | |
| $ 121,556 | $ 143,773 | ||||
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
| The Company adopted SFAS No. 142, “Goodwill and Other Intangibles,” on October 1, 2002 |
Goodwill and intangible assets consist of the following (in thousands):
| September 30, 2003 | September 30, 2002 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted Average Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
| Goodwill | $ 505,514 | $ -- | $ 505,514 | $ 905,219 | $ -- | $905,219 | |||||||||
| Amortized intangible assets: | |||||||||||||||
| Developed technology | 10 | 10,550 | (2,806 | ) | 7,744 | 21,260 | (576 | ) | 20,684 | ||||||
| Customer relationships | 10 | 12,700 | (1,598 | ) | 11,102 | 12,700 | (328 | ) | 12,372 | ||||||
| Other | 3 | 122 | (56 | ) | 66 | 122 | (11 | ) | 111 | ||||||
| 23,372 | (4,460 | ) | 18,912 | 34,082 | (915 | ) | 33,167 | ||||||||
| Unamortized intangible assets: | |||||||||||||||
| Trademarks | 3,269 | -- | 3,269 | 2,300 | -- | 2,300 | |||||||||
| 10 | $ 532,155 | $ (4,460 | ) | $ 527,695 | $ 941,601 | $ (915 | ) | $940,686 | |||||||
Annual amortization expense related to intangible assets consist of the followingare as follows (in thousands):
| Years Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||
| Amortization expense | $ 3,545 | $ 12,687 | $ 15,267 | ||||
The changes in the gross carrying amount of goodwill and intangible assets are as follows:
| Goodwill | Developed Technology | Customer Relationships | Trademarks | Other | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance as of September 30, 2001 | $ 71,412 | $ 5,995 | $ -- | $ -- | $ 793 | $ 78,200 | |||||||
| Additions (deductions) during year | 905,219 | 21,260 | 12,700 | 2,300 | 122 | 941,601 | |||||||
| Impairment losses | (71,412 | ) | (5,995 | ) | -- | -- | (793 | ) | (78,200 | ) | |||
| Balance as of September 30, 2002 | 905,219 | 21,260 | 12,700 | 2,300 | 122 | 941,601 | |||||||
| Additions (deductions) during year | (2,566 | ) | -- | -- | 969 | -- | (1,597 | ) | |||||
| Transitional impairment loss | (397,139 | ) | -- | -- | -- | -- | (397,139 | ) | |||||
| Impairment losses | (10,710 | ) | -- | -- | -- | -- | (10,710 | ) | |||||
| Balance as of September 30, 2003 | $ 505,514 | $ 10,550 | $12,700 | $3,269 | $ 122 | $ 532,155 | |||||||
| The additions (deductions) in fiscal 2003 primarily reflect income tax refunds and gains on the sale of acquired assets related to Alpha and the acquisition of a trademark. Impairment losses in fiscal 2003 represent the write-down of assets related to the Company’s infrastructure business and are included in special charges in the accompanying consolidated statements of operations. |
| The additions (deductions) in fiscal 2002 reflect the results of the purchase price allocation of Alpha in the Merger. Impairment losses in fiscal 2002 represent the write-down of all goodwill and other intangible assets associated with the Company’s acquisition of the Philsar Bluetooth business and are included in special charges in the accompanying consolidated statements of operations. |
| In accordance with SFAS No. 142, the following table provides net loss and related per share amounts for fiscal 2002 and 2001, |
| (In thousands, except per share amounts) | Years Ended September 30, | ||||
|---|---|---|---|---|---|
| 2002 | 2001 | ||||
| Reported net loss | $ (236,064 | ) | $ (318,924 | ) | |
| Goodwill amortization, net of tax | 10,699 | 13,909 | |||
| Adjusted net loss | $ (225,365 | ) | $ (305,015 | ) | |
| Per share information (1): | |||||
| Basic and diluted: | |||||
| Reported net loss | $ (1.72) | ||||
| Goodwill amortization, net of tax | 0.08 | ||||
| Adjusted net loss | $ (1.64) | ||||
(1) SeeNote 2 to the consolidated financial statements
Annual amortization expense related to intangible assets is expected to be as follows (in thousands):
| 2004 | 2005 | 2006 | 2007 | 2008 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortization expense | $ 2,285 | $ 2,161 | $ 2,144 | $ 2,144 | $ 2,144 | ||||||
NOTE 7. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
| September 30, | |||||
|---|---|---|---|---|---|
| 2003 | 2002 | ||||
| Product warranty accrual | $ 6,131 | $13,372 | |||
| Accrued merger expenses | 452 | 42,764 | |||
| Other | 21,220 | 28,427 | |||
| $27,803 | $84,563 | ||||
NOTE 8. BORROWING ARRANGEMENTS
LONG-TERM DEBT
| Long-term debt consists of the following (in thousands): |
| September 30, | |||||
|---|---|---|---|---|---|
| 2003 | 2002 | ||||
| Junior notes | $230,000 | $ -- | |||
| Senior notes | 45,000 | -- | |||
| Conexant Mexicali note | -- | 150,000 | |||
| Conexant revolving credit line used | -- | 30,000 | |||
| CDBG Grant | 29 | 168 | |||
| 275,029 | 180,168 | ||||
| Less - current maturities | 29 | 129 | |||
| $275,000 | $180,039 | ||||
| Junior notes represent the Company’s 4.75 percent convertible subordinated notes due 2007. These Junior notes can be converted into 110.4911 shares of common stock per $1,000 principal balance, which is the equivalent of a conversion price of approximately $9.05 per share. The Company may redeem the Junior notes at any time after November 20, 2005. The redemption price of the Junior notes during the period between November 20, 2005 through November 14, 2006 will be $1,011.875 per $1,000 principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date, and the redemption price of the notes beginning on November 15, 2006 and thereafter will be $1,000 per $1,000 principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date. Holders may require the Company to repurchase the Junior notes upon a change in control of the Company. The Company will pay interest in cash semi-annually in arrears on May 15 and November 15 of each year. |
| Senior notes represent the Company’s 15 percent convertible senior subordinated notes due June 30, |
| The Company has a ten-year $960,000 loan from the State of Maryland under the Community Development Block Grant (“CDBG”) program. Quarterly payments are due through December 2003 and represent principal plus interest at 5 percent of the unamortized balance. |
| Aggregate annual maturities of long-term debt are as follows (in thousands): |
| Fiscal Year | |||
|---|---|---|---|
| 2004 | $ 29 | ||
| 2005 | 45,000 | ||
| 2006 | -- | ||
| 2007 | -- | ||
| 2008 | 230,000 | ||
| $275,029 | |||
SHORT-TERM DEBT
| On July 15, 2003, the Company entered into a receivables purchase agreement under which it has agreed to sell from time to time certain of its accounts receivable to Skyworks USA, Inc. (“Skyworks USA”), a wholly-owned special purpose entity that is fully consolidated for accounting purposes. Concurrently, Skyworks USA entered into an agreement with Wachovia Bank, National Association providing for a $50 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. As of September 30, 2003, Skyworks USA had borrowed $41.7 million under this agreement. |
NOTE 5 BORROWING ARRANGEMENTS AND COMMITMENTS
LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
SEPTEMBER 30,
2002 2001
-------- ------
Conexant Mexicali note ............................. $150,000 $ --
Conexant revolving credit line used ................ 30,000 --
CDBG Grant ......................................... 168 --
-------- ------
180,168 --
Less - current maturities ...................... 129 --
-------- ------
$180,039 $ --
======== ======
On September 30, 2002, the Company had $150 million in short-term promissory
notes payable to Conexant pursuant to a financing agreement entered into in
connection with the purchase of the Mexicali Operations. The notes were secured
by the assets and properties of the Company. Unless paid earlier at the option
of the Company or pursuant to mandatory prepayment provisions contained in the
financing agreement with Conexant, fifty percent of the principal portion of the
short-term promissory notes was due on March 24, 2003, and the remaining fifty
percent of the notes was due on June 24, 2003. Interest on these notes was
payable quarterly at a rate of 10% per annum for the first ninety days following
June 25, 2002, 12% per annum for the next ninety days and 15% per annum
thereafter. Because the Company refinanced these notes, the principal amount was
classified on September 30, 2002 as a long-term note payable. In addition, on
September 30, 2002 the Company had available a short-term $100 million loan
facility from Conexant under the financing agreement to fund the
53
Skyworks Solutions, Inc. and Subsidiaries
Company's working capital and other requirements. $75 million of this facility
became available on or after July 10, 2002, and the remaining $25 million
balance of the facility would have become available if the Company had more than
$150 million of eligible domestic receivables. The entire principal of any
amounts borrowed under the facility was due on June 24, 2003. There were $30
million of borrowings as of September 30, 2002 under this facility. Because the
Company refinanced the amounts borrowed under this loan facility, the principal
amount was classified on September 30, 2002 as a long-term note payable.
On November 13, 2002, Skyworks successfully closed a private placement of $230
million of 4.75 percent convertible subordinated notes due 2007. These notes can
be converted into 110.4911 shares of common stock per $1,000 principal balance,
which is the equivalent of a conversion price of approximately $9.05 per share.
The net proceeds from the note offering were principally used to prepay debt
owed to Conexant under the financing agreement. The payments to Conexant retired
$105 million of the $150 million note relating to the purchase of the Mexicali
Operations and repaid the $65 million principal amount outstanding as of
November 13, 2002 under the loan facility, dissolving the $100 million facility
and resulting in the release of Conexant's security interest in all assets and
properties of the Company.
In connection with the prepayment by the Company of $105 million of the $150
million note owed to Conexant relating to the purchase of the Mexicali
Operations, the remaining $45 million principal balance was exchanged for a new
15% convertible debt security with a maturity date of June 30, 2005. These
notes can be converted into the Company's common stock at a conversion rate
based on the applicable conversion price, which is subject to adjustment based
on, among other things, the market price of the Company's common stock. Based
on this adjustable conversion price, the Company expects that the maximum
number of shares that could be issued under the note is approximately 7.1
million shares, subject to adjustment for stock splits and other similar
dilutive occurrences.
The Company obtained a ten-year $960,000 loan from the State of Maryland under
the Community Development Block Grant program. Quarterly payments are due
through December 2003 and represent principal plus interest at 5% of the
unamortized balance.
Aggregate annual maturities of long-term debt are as follows (in thousands):
FISCAL YEAR
-----------
2003 ...................................... $ 129
2004 ...................................... 39
2005 ...................................... 45,000
2006 ...................................... --
2007 ...................................... 135,000
--------
$180,168
========
NOTE 69. INCOME TAXES
Loss before income taxes consisted of the following components (in thousands):
| Income (loss) before income taxes and cumulative effect of change in accounting principle consists of the following components (in thousands): |
| Years Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||
| United States | $(59,379 | ) | $(151,214 | ) | $(323,642 | ) | |
| Foreign | 5,754 | (104,439 | ) | 6,337 | |||
| $(53,625 | ) | $(255,653 | ) | $(317,305 | ) | ||
| The provision for income taxes from continuing operations consists of the following (in thousands): |
| Years Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||
| Current tax expense: | |||||||
| Federal | $ -- | $ -- | $ -- | ||||
| State | -- | -- | -- | ||||
| Foreign | 1,414 | 3,506 | 1,619 | ||||
| 1,414 | 3,506 | 1,619 | |||||
| Deferred tax expense (benefit): | |||||||
| Federal | -- | -- | -- | ||||
| State | -- | -- | -- | ||||
| Foreign | (762 | ) | (23,095 | ) | -- | ||
| (762 | ) | (23,095 | ) | -- | |||
| Net income tax expense (benefit) | $ 652 | $(19,589 | ) | $1,619 | |||
| The actual income tax expense (benefit) |
| Years Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||
| Tax (benefit) expense at U.S. statutory rate | $ (18,769 | ) | $ (89,479 | ) | $ (111,057 | ) | |
| Foreign tax rate difference | (1,362 | ) | 3,529 | (599 | ) | ||
| Nondeductible amortization of intangible assets | -- | 16,151 | 5,099 | ||||
| Nondeductible in-process research and development | -- | 22,925 | -- | ||||
| Nondeductible interest expense | 2,113 | -- | -- | ||||
| Pre-distribution loss not available to Skyworks | -- | 21,968 | -- | ||||
| Research and development credits | (5,369 | ) | (711 | ) | (4,921 | ) | |
| State income taxes, net of federal benefit | -- | -- | (11,672 | ) | |||
| Change in valuation allowance | 25,168 | 5,947 | 123,466 | ||||
| Other, net | (1,129 | ) | 81 | 1,303 | |||
| $ 652 | $ (19,589 | ) | $ 1,619 | ||||
| Deferred income tax assets and liabilities consist of the tax effects of temporary differences related to the following (in thousands): |
| September 30, | |||||
|---|---|---|---|---|---|
| 2003 | 2002 | ||||
| Current: | |||||
| Inventories | $ 11,878 | $ 14,352 | |||
| Deferred revenue | -- | 258 | |||
| Accrued compensation and benefits | 1,907 | 1,914 | |||
| Product returns, allowances and warranty | 4,259 | 8,097 | |||
| Restructuring | 1,295 | 5,475 | |||
| Deferred state taxes | -- | -- | |||
| Other - net | 1,494 | 523 | |||
| Current deferred income taxes | 20,833 | 30,619 | |||
| Long-term: | |||||
| Property, plant and equipment | 46,356 | 51,321 | |||
| Intangible assets | 8,837 | (13,029 | ) | ||
| Retirement benefits and deferred compensation | 1,172 | 931 | |||
| Net operating loss carryforwards | 61,049 | 27,003 | |||
| Federal tax credits | 7,798 | 3,904 | |||
| State investment credits | 5,541 | 2,672 | |||
| Restructuring | 2,978 | 2,688 | |||
| Other - net | 855 | (416 | ) | ||
| Long-term deferred income taxes | 134,586 | 75,074 | |||
| Total deferred income taxes | 155,419 | 105,693 | |||
| Valuation allowance | (131,975 | ) | (83,206 | ) | |
| Net deferred tax assets | $ 23,444 | $ 22,487 | |||
| Based upon a history of significant operating losses, management has determined that it is more likely than not that historic and current year income tax benefits will not be realized except for certain future deductions associated with the Mexicali Operations in the post-Merger period. Consequently, no United States income tax benefit has been recognized relating to the U.S. operating losses. As of September 30, 2003, the Company has established a valuation allowance against all of its net U.S. deferred tax assets. The net change in the valuation allowance of $48.8 million is principally due to the generation of additional tax attributes, i.e. federal and state net operating loss and credit carryovers, and other intangibles associated with the Mexicali transaction. The future realization of certain deferred assets will be applied to reduce the carrying value of goodwill. The portion of the valuation allowance for these deferred tax assets for which subsequently recognized tax benefits will be applied to reduce goodwill related to the purchase consideration of the Merger with Alpha is approximately $44 million. Deferred tax assets have been recognized for foreign operations when management believes they will be recovered during the carry-forward period. The Company does not expect to recognize any income tax benefits relating to future operating losses generated in the United States until management determines that such benefits are more likely than not to be realized. In 2002, the Company recorded a tax benefit of approximately $23 million related to the impairment of its Mexicali assets. A valuation allowance has not been established because the Company believes that the related deferred tax asset will be recovered during the carryforward period. |
| As of September 30, 2003, the Company has U.S. federal net operating loss carryforwards of approximately $164.5 million which will expire at various dates through 2023 and aggregate state net operating loss carryforwards of approximately $59.5 million which will expire at various dates through 2008. The Company also has U.S. federal and state income tax credit carryforwards of approximately $12.4 million. The U.S. federal tax credits expire at various dates through 2023. The use of the pre-Merger net operating loss and tax credit carryovers from Alpha will be limited due to statutory tax restrictions resulting from the Merger and related change in ownership. The annual limit on the utilization of pre-merger net operating losses has been estimated at $14 million. Pre-Merger credits would also be subject to the tax equivalent of the annual net operating loss limitation. |
| No provision has been made for United States, state, or additional foreign income taxes related to approximately $3.8 million of undistributed earnings of foreign subsidiaries which have been or are intended to be permanently reinvested. It is not practical to determine the United States federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested. |
| As part of the spin-off and the Merger, Washington, Conexant and Alpha entered into a tax allocation agreement which provides, among other things, for the allocation between Conexant and the combined company of certain tax liabilities relating to the Washington Business. In general, Conexant assumed and is responsible for tax liabilities of the Washington Business and Washington for periods prior to the Merger and the combined company has assumed and is responsible for tax liabilities of the Washington Business for periods after the Merger. Subsequent to the execution of the tax allocation agreement, and in connection with the refinancing agreement and amended financing agreement with Conexant, we entered into a letter agreement on November 6, 2002 with Conexant that amends the tax allocation agreement to limit our indemnification obligations under the tax allocation agreement to a reduced set of circumstances that could trigger such indemnification. However, the tax allocation agreement continues to provide that we will be responsible for various other tax obligations and for compliance with various representations and covenants made under the tax allocation agreement. |
NOTE 10. STOCKHOLDERS’ EQUITY
| Prior to the Merger with Alpha, Conexant’s wireless business had no separate capitalization. The following information represents the Company’s capital structure following the Merger. |
COMMON STOCK
| The Company is authorized to issue (1) 525,000,000 shares of common stock, par value $0.25 per share, and (2) 25,000,000 shares of preferred stock, without par value. |
| Holders of the Company’s common stock are entitled to such dividends as may be declared by the Company’s board of directors out of funds legally available for such purpose. Dividends may not be paid on common stock unless all accrued dividends on preferred stock, if any, have been paid or declared and set aside. In the event of the Company’s liquidation, dissolution or winding up, the holders of common stock will be entitled to share pro rata in the assets remaining after payment to creditors and after payment of the liquidation preference plus any unpaid dividends to holders of any outstanding preferred stock. |
| Each holder of the Company’s common stock is entitled to one vote for each such share outstanding in the holder’s name. No holder of common stock is entitled to cumulate votes in voting for directors. The Company’s second amended and restated certificate of incorporation provides that, unless otherwise determined by the Company’s board of directors, no holder of common stock has any preemptive right to purchase or subscribe for any stock of any class which the Company may issue or sell. |
| On August 11, 2003 the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) with respect to the issuance of up to $250 million aggregate principal amount of securities, including debt securities, common or preferred shares, warrants or any combination thereof. This registration statement, which the SEC declared effective on August 28, 2003, provides the Company with greater flexibility and access to capital. On September 9, 2003 the Company issued 9.2 million shares of common stock under its shelf registration statement. The Company may from time to time issue securities under the remaining balance of the shelf registration statement for general corporate purposes. |
| At September 30, 2003, the Company had 148,604,137 shares of common stock issued and outstanding. |
PREFERRED STOCK
| The Company’s second amended and restated certificate of incorporation permits the Company to issue up to 25,000,000 shares of preferred stock in one or more series and with rights and preferences that may be fixed or designated by the Company’s board of directors without any further action by the Company’s stockholders. The designation, powers, preferences, rights and qualifications, limitations and restrictions of the preferred stock of each series will be fixed by the certificate of designation relating to such series, which will specify the terms of the preferred stock. |
| At September 30, 2003, the Company had no shares of preferred stock issued or outstanding. |
STOCK OPTIONS
| The Company has stock option plans under which employees 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 four years and expire ten years after the grant date. As of September 30, 2003, a total of 24.1 million shares are authorized for grant under the Company’s long-term incentive plans. The number of common shares reserved for granting of future awards was 14.2 million at September 30, 2003. |
| Pursuant to an exchange offer dated June 16, 2003 (the “Exchange Offer”), the Company offered a stock option exchange program to its employees, other than its executive officers under Section 16 of the Securities Exchange Act of 1934, as amended, giving them the right to tender outstanding stock options with an exercise price of $13.00 per share or more in exchange for new options to be issued six months and one day after the close of the Exchange Offer. On July 3, 2003, the expiration date of the Company’s Exchange Offer, the Company accepted for exchange from eligible employees options to purchase an aggregate of 5,328,085 shares of the Company’s common stock. These stock options were cancelled as of that date. Pursuant to the Exchange Offer, a ratio was applied to the options accepted for exchange from eligible employees and the Company expects that it will issue, on January 5, 2004, new options to purchase approximately 3,428,881 shares of the Company’s common stock with an exercise price at fair market value in exchange for the options cancelled in connection with the offer. These new options will vest ratably over an eighteen-month period. The Exchange Offer qualifies for fixed accounting and thus the Company does not expect to recognize compensation expense in connection with the grant of the replacement options pursuant to the Exchange Offer. |
| In connection with Conexant’s spin-off of Washington, options to purchase shares of Conexant common stock were adjusted so that immediately following the spin-off, option holders held options to purchase shares of Conexant common stock and options to purchase Washington common stock. In connection with the Merger, those options to purchase shares of Washington common stock were converted into options to purchase the Company’s common stock, par value $0.25 per share. The terms of options to purchase the Company’s common stock will be governed by the Washington Sub, Inc. 2002 Stock Option Plan, which was assumed by Skyworks in the Merger and which provides that such options will generally have the same terms and conditions applicable to the original Conexant options. These options are included in the following schedules and options related to non-employees are disclosed separately below. |
| A summary of stock option transactions follows (shares in thousands): |
| Shares | Weighted average exercise price of shares under plan | ||||
|---|---|---|---|---|---|
| Balance outstanding prior to the close of the Merger | -- | $ -- | |||
| Recapitalization as a result of the Merger: | |||||
| Alpha options assumed | 8,277 | 18.97 | |||
| Conexant options assumed | 23,188 | 20.80 | |||
| Balance outstanding at June 25, 2002 | 31,465 | $20.32 | |||
| Granted | 998 | 4.69 | |||
| Exercised | (20 | ) | 2.08 | ||
| Cancelled | (1,111 | ) | 23.35 | ||
| Balance outstanding at September 30, 2002 | 31,332 | $19.73 | |||
| Granted | 6,372 | 5.06 | |||
| Exercised | (496 | ) | 6.37 | ||
| Accepted for exchange | (5,328 | ) | 23.38 | ||
| Cancelled | (6,117 | ) | 20.21 | ||
| Balance outstanding at September 30, 2003 | 25,763 | $15.44 | |||
| Options exercisable at the end of each fiscal year (shares in thousands): |
| Shares | Weighted average exercise price | ||||
|---|---|---|---|---|---|
| 2003 | 15,141 | $ 19 | .03 | ||
| 2002 | 16,080 | $ 19 | .86 | ||
| The following table summarizes information concerning currently outstanding and exercisable options as of September 30, 2003 (shares in thousands): |
| Range of exercise prices | Number outstanding | Weighted average remaining contractual life (years) | Weighted average outstanding option price | Options exercisable | Weighted average exercise price | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| $0.00 - | $9.99 | 8,731 | 8 | .2 | $ 5 | .44 | 1,636 | $ 5 | .74 | ||||
| $10.00 - | $19.99 | 8,659 | 5 | .2 | $ 15 | .82 | 7,184 | $ 16 | .03 | ||||
| $20.00 - | $29.99 | 6,841 | 6 | .7 | $ 21 | .97 | 5,012 | $ 21 | .87 | ||||
| $30.00 - | 39.99 | 1,224 | 4 | .7 | $ 37 | .57 | 1,073 | $ 38 | .04 | ||||
| $40.00 - | $59.99 | 231 | 6 | .0 | $ 45 | .76 | 174 | $ 45 | .80 | ||||
| $60.00 - | $210.35 | 77 | 4 | .2 | $ 82 | .98 | 62 | $ 83 | .05 | ||||
| 25,763 | 6 | .6 | $ 15 | .44 | 15,141 | $ 19 | .03 | ||||||
STOCK OPTION DISTRIBUTION
| The following table summarizes information concerning currently outstanding options as of September 30, 2003 (shares in thousands): |
| Number outstanding | % of total common stock outstanding | ||||
|---|---|---|---|---|---|
| Stock options held by non-employees (excluding directors) | 14,352 | 9 | .7% | ||
| Stock options held by employees and directors | 11,411 | 7 | .7% | ||
| 25,763 | 17 | .4% | |||
| As of September 30, 2003, the Company’s ratio of options outstanding as a percentage of total common stock outstanding (“overhang”) was 17.4%. The overhang attributable to options held by non-employees (other than its non-employee directors) was 9.7% and the overhang attributable to employees and directors was 7.7%. |
| In connection with the Merger, as of September 30, 2003 and 2002 non-employees, excluding directors, held 14,351,737 and 18,184,701 options at a weighted average price of $16.76 and $20.49, respectively. Effective June 25, 2002, in connection with the Merger each Conexant option holder, other than holders of options granted to employees of Conexant’s former Mindspeed Technologies segment on March 30, 2001 and options held by persons in certain foreign locations, received an option to purchase an equal number of shares of common stock of the Washington subsidiary. In the Merger, each outstanding Washington option was converted into an option to purchase Skyworks common stock. The conversion of Washington options into Skyworks’ options was done in such a manner that (1) the aggregate intrinsic value of the options immediately before and after the conversion was the same, (2) the ratio of the exercise price per option to the market value per option was not reduced, and (3) the vesting provisions and options period of the Skyworks’ options were the same as the original vesting terms and option period of the corresponding Washington options. As a result, there are a large number of options held by persons other than Skyworks’ employees and directors. More specifically, non-employees hold a greater number of options to purchase Skyworks’ common stock than do Skyworks’ employees. |
RESTRICTED STOCK AWARDS
| The Company’s long-term incentive plans provide for awards of restricted shares of common stock and other stock-based incentive awards to officers and other employees and certain non-employees. Restricted stock awards are subject to forfeiture if employment terminates during the prescribed retention period (generally within two years of the date of award) or, in certain cases, if prescribed performance criteria are not met. The fair value of restricted stock awards is charged to expense over the vesting period. There were no restricted stock grants during fiscal years 2003 and 2002. |
STOCK OPTION PLANS FOR DIRECTORS
| The Company has three stock option plans for non-employee directors — the 1994 Non-Qualified Stock Option Plan, the 1997 Non-Qualified Stock Option Plan and the Directors’ 2001 Stock Option Plan. Under the three plans, a total of 826,000 shares have been authorized for option grants. The three plans have substantially similar terms and conditions and are structured to provide options to non-employee directors as follows: a new director receives a total of 45,000 options upon becoming a member of the Board; and continuing directors receive 15,000 options after each Annual Meeting of Shareholders. Under these plans, the option price is the fair market value at the time the option is granted. Beginning in fiscal 2001, all options granted become exercisable 25% per year beginning one year from the date of grant. Options granted prior to fiscal 2001 become exercisable at a rate of 20% per year beginning one year from the date of grant. During fiscal 2003, 114,000 options were granted under these plans at a weighted average price of $6.66. At September 30, 2003, a total of 627,000 options, net of cancellations, at a weighted average price of $13.84 have been granted under these three plans and 301,500 shares were exercisable at a weighted average price of $19.45. During fiscal 2003 and 2002, no options were exercised under these plans. Non-employee directors of the Company are also eligible to receive option grants under the Company’s 1996 Long-Term Incentive Plan. |
EMPLOYEE STOCK PURCHASE PLAN
| The Company maintains a domestic and an international employee stock purchase plan. Under these plans, eligible employees may purchase common stock through payroll deductions of up to 10% of compensation. The price per share is the lower of 85% of the market price at the beginning or end of each six-month offering period. The plans provide for purchases by employees of up to an aggregate of 1,880,000 shares through December 31, 2012. Shares of 704,921 and 65,668 were purchased under these plans in fiscal 2003 and 2002, respectively. |
STOCK WARRANTS
| In connection with the Merger, the Company issued to Jazz Semiconductor, Inc. (“Jazz Semiconductor”) a warrant to purchase 1,017,900 shares of Skyworks common stock at a price of $24.02 per share. This warrant became exercisable in increments of 25% as of June 25, 2002, March 11, 2003, September 11, 2003 and March 11, 2004. The Company applied the Black-Scholes model to determine the fair value estimate and approximately $0.8 million and $0.2 million was included in amortization of intangible assets |
NOTE 11. EMPLOYEE BENEFIT PLAN
| 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 |
| Conexant sponsored various benefit |
NOTE 12. PENSIONS AND OTHER RETIREE BENEFITS
| In connection with Conexant’s spin-off of its Washington/Mexicali business, Conexant transferred obligations to Washington/Mexicali for its pension plan and retiree benefits. The amounts that were transferred relate to approximately twenty Washington/Mexicali employees that had enrolled in Conexant’s Voluntary Early Retirement Plan (“VERP”) in 1998. The VERP also provides health care benefits to members of the plan. The Company currently does not offer pension plans or retiree benefits to its employees. |
| The components of defined benefit expense for fiscal 2003 are as follows (in thousands): |
| Pension Benefits | Retiree Medical Benefits | ||||
|---|---|---|---|---|---|
| Service cost-benefits earned | $ -- | $ -- | |||
| Interest cost on benefit obligation | 175 | 70 | |||
| Estimated return on assets | (59 | ) | -- | ||
| Net amortization | 3 | 50 | |||
| Net periodic benefit cost | $ 119 | $120 | |||
| The funded status of the Company’s principal defined benefit and retiree medical benefit plans and the amounts recognized in the balance sheet for fiscal 2003 are as follows (in thousands): |
| Pension Benefits | Retiree Medical Benefits | ||||
|---|---|---|---|---|---|
| Change in benefit obligation: | |||||
| Balance at beginning of year | $ 2,652 | $ 1,014 | |||
| Benefit payments | (256 | ) | (38 | ) | |
| Service and interest costs | 175 | 70 | |||
| Actuarial (gains) losses | 323 | -- | |||
| Balance at end of year | $ 2,894 | $ 1,046 | |||
| Change in fair value of plan assets: | |||||
| Balance at beginning of year | $ 1,419 | $ -- | |||
| Actual return on plan assets | 77 | -- | |||
| Employer contribution | 579 | -- | |||
| Benefit payments | (256 | ) | -- | ||
| Balance at end of year | $ 1,819 | $ -- | |||
| Benefit obligations in excess of plan assets | $ (1,075 | ) | $ (1,046 | ) | |
| Unrecognized net actuarial loss | 632 | -- | |||
| Net accrued benefit cost | $ (443 | ) | $ (1,046 | ) | |
| The assumptions used in determining retirement benefit obligations for fiscal 2003 are as follows: |
| Pension Benefits | Retiree Medical Benefits | ||||
|---|---|---|---|---|---|
| Discount rate | 6 | % | 7 | % | |
| Long-term rate of return on assets | 4 | % | N | /A | |
| An increase in the health care cost trend rate by 1% would increase the accumulated retirement medical obligation by $0.1 million at September 30, 2003 and would not affect retirement medical expense. Consequently, a decrease in the health care cost trend rate by 1% would decrease the accumulated retirement medical obligation by $0.1 million at September 30, 2003 and would not affect retirement medical expense. |
NOTE 13. COMMITMENTS
| The Company has various operating leases primarily for computer equipment and buildings. Rent expense amounted to $10.4 million, $7.1 million and $4.9 million in fiscal 2003, 2002 2001, respectively. Purchase options may be exercised, at fair market value, at various times for some of these leases. Future minimum payments under these noncancelable leases are as follows (in thousands): |
| Fiscal Year | |||||
|---|---|---|---|---|---|
| 2004 | $ 7,328 | ||||
| 2005 | 6,051 | ||||
| 2006 | 4,906 | ||||
| 2007 | 4,465 | ||||
| 2008 | 4,348 | ||||
| Thereafter | 7,034 | ||||
| $34,132 | |||||
| Under supply agreements entered into with Conexant and subsequently with Jazz Semiconductor the Company receives wafer fabrication, wafer probe and certain other services from Jazz Semiconductor’s Newport Beach, California foundry. |
| Pursuant to the terms of these agreements, the Company is committed to obtaining certain minimum wafer volumes from Jazz Semiconductor. The Company’s expected minimum purchase obligations under these supply agreements will be approximately $39 million and $13 million in fiscal 2004 and 2005, respectively. The Company originally estimated its obligation under this agreement would result in excess costs of approximately $12.9 million when recorded as a liability and charged to cost of sales in the third quarter of fiscal 2002. During the fourth quarter of fiscal 2002, the Company reevaluated this obligation and reduced its liability and cost of sales by approximately $8.1 million in the quarter. During the first quarter of fiscal 2003, the Company reevaluated the remaining $4.8 million obligation related to Jazz Semiconductor and reduced its liability and cost of sales by approximately $4.8 million in the quarter. The Company currently anticipates meeting each of the annual minimum purchase obligations under these supply agreements. |
NOTE 14. CONTINGENCIES
| From time to time various lawsuits, claims and proceedings have been, and may in the future be, instituted or asserted against Skyworks, including those pertaining to patent infringement, intellectual property, environmental, product liability, safety and health, employment and contractual matters. In addition, in connection with the Merger, |
| 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. At the present time, the Company is in discussions with Qualcomm Incorporated (“Qualcomm”) regarding claims that both the Company and Qualcomm filed and first served against each other on December 4, 2003 asserting violations of certain of each company’s respective intellectual property rights. The purpose of these discussions is to arrive at a business resolution that avoids protracted litigation for both parties. The Company believes Qualcomm’s claims are without merit and if the Company is not successful resolving this matter outside of litigation, it is prepared to vigorously defend against Qualcomm’s claims and fully prosecute its claims against them. |
NOTE 15. GUARANTEES
| The Company has made guarantees and indemnities, under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions. In connection with the Merger, the Company assumed responsibility for all contingent liabilities and then-current and future litigation (including environmental and intellectual property proceedings) against Conexant or its subsidiaries to the extent related to the operations or assets of the wireless business of Conexant. The Company may also be responsible for certain federal income tax liabilities that relate to Washington/Mexicali’s spin-off from Conexant under the Tax Allocation Agreement, dated as of June 25, 2002, between the Company and Conexant, which provides that the Company will be responsible for certain taxes imposed on Conexant or its shareholders. The Company’s obligations under the tax allocation agreement have been limited by a letter dated November 6, 2002 entered into in connection with the debt refinancing with Conexant. |
| In connection with the sales of its products, the Company provides certain intellectual property indemnities to its customers. 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 guarantees and indemnities varies, and in many cases is indefinite. The guarantees and 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 guarantees and 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 guarantees and indemnities in the accompanying consolidated balance sheets. |
NOTE 16. SPECIAL CHARGES
ASSET IMPAIRMENTS
| During the fourth quarter of fiscal 2003, the Company recorded a $26.0 million charge for the impairment of assets related to certain infrastructure products manufactured in its Woburn, Massachusetts and Adamstown, Maryland facilities. The Woburn facility primarily manufactures semiconductor products based on both silicon wafer technology and gallium arsenide technology. The Company’s Adamstown, Maryland facility primarily manufactures ceramics components. The Company experienced a significant decline in factory utilization resulting from a downturn in the market for products manufactured at these two facilities and a decision to discontinue certain products. The impairment charge was based on a recoverability analysis prepared by management based on these factors and the related impact on its current and projected outlook. The Company projected lower revenues and new order volume for these products and management believed these factors indicated that the carrying value of the related assets (machinery, equipment and intangible assets) may have been impaired and that an impairment analysis should be performed. In performing the analysis for recoverability, management estimated the future cash flows expected to result from these products over a five-year period. Since the estimated undiscounted cash flows were less than the carrying value of the related assets, it was concluded that an impairment loss should be recognized. In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the impairment charge was determined by comparing the estimated fair value of the related assets to their carrying value. The fair value of the assets was determined by computing the present value of the estimated future cash flows using a discount rate of 16%, which management believed was commensurate with the underlying risks associated with the projected future cash flows. Management believes the assumptions used in the discounted cash flow model represented a reasonable estimate of the fair value of the assets. The write down established a new cost basis for the impaired assets. The anticipated pre-tax cost savings related to these impairment charges is expected to be $17.4 million over the next five years (fiscal 2004 through fiscal 2008) and $8.6 million over the subsequent fifteen years (fiscal 2009 through 2023). |
| In addition, during the fourth quarter of fiscal 2003 the Company recorded a $2.3 million charge for the impairment of its Haverhill, Massachusetts property currently being held for sale. In fiscal 2003, the Company relocated its operations from this facility to its Woburn, Massachusetts facility. The Company is actively marketing the property located in Haverhill, Massachusetts. |
| During fiscal 2002, the Company recorded a $66.0 million charge for the impairment of the assembly and test machinery and equipment and related facility in Mexicali, Mexico. The impairment charge was based on a recoverability analysis prepared by management as a result of a significant downturn in the market for test and assembly services for non-wireless products and the related impact on the Company’s current and projected outlook. |
| The Company experienced a severe decline in factory utilization at its Mexicali facility for non-wireless products and projected decreasing revenues and new order volume. Management believed these factors indicated that the carrying value of the assembly and test machinery and equipment and related facility may have been impaired and that an impairment analysis should be performed. In performing the analysis for recoverability, management estimated the future cash flows expected to result from the manufacturing activities at the Mexicali facility over a ten-year period. The estimated future cash flows were based on a gradual phase-out of services sold to Conexant and modest volume increases consistent with management’s view of the outlook for the business, partially offset by declining average selling prices. The declines in average selling prices were consistent with historical trends and management’s decision to reduce capital expenditures for future capacity expansion. Since the estimated undiscounted cash flows were less than the carrying value (approximately $100 million based on historical cost) of the related assets, it was concluded that an impairment loss should be recognized. The impairment charge was determined by comparing the estimated fair value of the related assets to their carrying value. The fair value of the assets was determined by computing the present value of the estimated future cash flows using a discount rate of 24%, which management believed was commensurate with the underlying risks associated with the projected future cash flows. Management believes the assumptions used in the discounted cash flow model represented a reasonable estimate of the fair value of the assets. The write down established a new cost basis for the impaired assets. |
| During fiscal 2002, the Company recorded a $45.8 million charge for the write-off of goodwill and other intangible assets associated with its acquisition of Philsar Semiconductor Inc. (“Philsar”) in fiscal 2000. Philsar was a developer of radio frequency semiconductor solutions for personal wireless connectivity, including emerging standards such as Bluetooth, and radio frequency components for third-generation digital cellular handsets. Management determined that the Company would not support the technology associated with the Philsar Bluetooth business. Accordingly, this product line was discontinued and the employees associated with the product line were either severed or relocated to other operations. As a result of the actions taken, management determined that the remaining goodwill and other intangible assets associated with the Philsar acquisition were impaired. |
| During the third quarter of fiscal 2001, the Company recorded an $86.2 million charge for the impairment of the manufacturing facility and related wafer fabrication machinery and equipment at the Company’s Newbury Park, California facility. This impairment charge was based on a recoverability analysis prepared by management as a result of the |
RESTRUCTURING CHARGES
| During the second and fourth quarters of fiscal 2003, the Company recorded $3.3 million and $2.9 million, respectively, in restructuring charges to provide for workforce reductions and the consolidation of facilities. The charges were based upon estimates of the cost of severance benefits for affected employees and lease cancellation, facility sales, and other costs related to the consolidation of facilities. Substantially all amounts accrued for these actions are expected to be paid within one year. |
| During fiscal 2002, the Company implemented a number of cost reduction initiatives to more closely align its cost structure with the then-current business environment. The Company recorded restructuring charges of approximately $3.0 million for costs related to the workforce reduction and the consolidation of certain facilities. Substantially all amounts accrued for these actions have been paid. |
| During fiscal 2001, Washington/Mexicali reduced its workforce by approximately 250 employees, including approximately 230 employees in manufacturing operations. Restructuring charges of $2.7 million were recorded for such actions and were based upon estimates of the cost of severance benefits for the affected employees. The Company has paid all amounts accrued for these actions. |
| Activity and liability balances related to the fiscal 2002 and fiscal 2003 restructuring actions are as follows (in thousands): |
| Fiscal 2002 Workforce Reductions | Fiscal 2002 Facility Closings and Other | Fiscal 2003 Workforce Reductions | Fiscal 2003 Facility Closings and Other | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Charged to costs and expenses | $ | 2,923 | $ | 97 | $ | -- | $ | -- | $ | 3,020 | |||||||
| Cash payments | (2,225 | ) | (13 | ) | -- | -- | (2,238 | ) | |||||||||
| Restructuring balance, September 30, 2002 | 698 | 84 | -- | -- | 782 | ||||||||||||
| Charged to costs and expenses | -- | -- | 4,819 | 1,405 | 6,224 | ||||||||||||
| Cash payments | (698 | ) | (47 | ) | (3,510 | ) | (1,236 | ) | (5,491 | ) | |||||||
| Restructuring balance, September 30, 2003 | $ | -- | $ | 37 | $ | 1,309 | $ | 169 | $ | 1,515 | |||||||
| In addition, the Company assumed approximately $7.8 million of restructuring reserves from Alpha |
NOTE 17. SEGMENT INFORMATION AND CONCENTRATIONS
| The Company follows SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and in interim reports to shareholders. The method for determining what information to report is based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance. In evaluating financial performance, management uses sales and operating profit as the measure of the segments’ profit or loss. Based on the guidance in SFAS No. 131, the Company has one operating segment for financial reporting purposes. |
| The Company operates in one business segment, which designs, develops, manufactures and markets proprietary semiconductor products and system solutions for manufacturers of wireless communication products. |
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): |
| Years Ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||||||
| United States | $ | 87,691 | $ | 72,185 | $ | 63,948 | |||||
| Other Americas | 69,559 | 4,615 | 5,455 | ||||||||
| Total Americas | 157,250 | 76,800 | 69,403 | ||||||||
| South Korea | 157,772 | 237,681 | 142,459 | ||||||||
| Other Asia-Pacific | 218,817 | 114,974 | 23,898 | ||||||||
| Total Asia-Pacific | 376,589 | 352,655 | 166,357 | ||||||||
| Europe, Middle East and Africa | 83,950 | 28,314 | 24,691 | ||||||||
| $ | 617,789 | $ | 457,769 | $ | 260,451 | ||||||
| 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. |
| Long-lived assets by geographic area are as follows (in thousands): |
| September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | |||||||
| United States | $ | 101,871 | $ | 109,975 | ||||
| Mexico | 21,223 | 30,427 | ||||||
| Other | 4,671 | 3,371 | ||||||
| $ | 127,765 | $ | 143,773 | |||||
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. Samsung Electronics, Co. accounted for 18% and 27% of the Company’s gross accounts receivable balances at September 30, 2003 and 2002, |
| The following customers accounted for 10% or more of net revenues: |
| Years Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||
| Samsung Electronics Co., | 15 | % | 35 | % | 44 | % | |
| Motorola, Inc. | 11 | % | 11 | % | * | ||
| Conexant | * | * | 17 | % | |||
| Nokia Corporation | * | * | 12 | % | |||
| * Represents less than 10% of net revenues |
| Section 16(a) Compliance — The information in the section entitled “Section 16(a) Beneficial Ownership Compliance,” appearing in the Proxy Statement, is incorporated herein by reference. |
ITEM 11. EXECUTIVE COMPENSATION
The Procter & Gamble Company and a former director of Amoco
Corporation, ArvinMeritor, Inc., Rockwell and The Times Mirror Company. He is a
trustee of California Institute of Technology, a member of the Foundation Board
of Trustees at the University of California, Irvine and an overseer of the
Hoover Institution. He is also a member of The Business Council and numerous
professional, civic and entrepreneurial organizations.
MOIZ M. BEGUWALA, age 56, has been a Director since June 2002. He is an
executive employee of Conexant. He served as Senior Vice President and General
Manager Wireless Communications 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.
TIMOTHY R. FUREY, age 44, has been a Director since 1998. He also serves as
chief executive officer of MarketBridge, a privately-owned sales and marketing
strategy and technology professional services firm, since 1991. 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 46, has been a Director since June 2002. He also has
served as Senior Vice President and Chief Financial Officer of Conexant since
December 1998 and as 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.
THOMAS C. LEONARD, age 68, has been a Director since August 1996. From April
2000 until June 2002 he served as Chairman of the Board. From September 1999 to
April 2000, he served as Chief Executive Officer. From July 1996 to September
1999, he served as President and Chief Executive Officer. Mr. Leonard joined us
in 1992 as a Division General Manager and was elected a Vice President in 1994.
Mr. Leonard has over thirty years' experienceinformation in the microwave industry, having
held a varietysections entitled “Compensation of executiveExecutive Officers” and senior level management and marketing positions
at M/A-COM, Inc., Varian Associates, Inc. and Sylvania. Mr. Leonard is a
director of the Massachusetts Telecommunications Council.
DAVID J. MCLACHLAN, age 64, has been a Director since 2000. He also was the
Executive Vice President and Chief Financial Officer of Genzyme Corporation, a
biotechnology company, from 1989 to 1999. Mr. McLachlan is currently a senior
adviser to Genzyme's chairman and chief executive officer. Prior to joining
Genzyme, Mr. McLachlan served as Vice President, Finance of Adams-Russell
Company, an electronic component supplier and cable television franchise owner.
Mr. McLachlan also serves on the boards of directors of Dyax Corporation, a
biotechnology company, and HEARx, Ltd., a hearing care services company.
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Skyworks Solutions, Inc. and Subsidiaries
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers to file reports of holdings and
transactions of securities of the Company with the SEC. Based on Company
records, and other information, the Company believes that all SEC filing
requirements applicable to its directors and executive officers with respect to
the Company's fiscal year ended September 27, 2002 were met, except that (i)
George M. LeVan, upon his appointment as an executive officer of the Company,
failed to timely file one Form 3, and (ii) Dwight W. Decker, the Chairman of the
Board, filed an amended Form 3 to disclose ownership of certain options to
purchase shares of the Company's common stock that were not reflected on his
original Form 3.
ITEM 11 EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table presents information about total compensation received
during the last three completed fiscal years by the Chief Executive Officer and
the four next most highly compensated persons serving as executive officers for
the periods indicated, except as noted in the footnotes below (the "Named
Executives").
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL STOCK UNDERLYING ALL OTHER
POSITION YEAR (1) SALARY BONUS AWARDS (#) OPTION (#) COMPENSATION (2)
-------- ------ ----- ---------- ---------- ----------------
David J. Aldrich .................... 2002-S $174,462 $ -- -- 475,000
President and Chief Executive Officer 2002 $351,154 $ -- -- 160,000 $ 8,922
2001 $336,615 $ -- -- 150,000 $ 8,550
2000 $278,269 $284,800 -- 120,000 $ 6,839
Kevin D. Barber ..................... 2002(3) $253,846 $ -- -- 84,552 $ 7,685
Senior Vice President, Operations ... 2001(3) $232,766 $ 74,850 -- 14,304 $ 26,711(4)
2000(3) $185,099 $ -- -- 12,280 $ 6,345
Liam K. Griffin ..................... 2002-S $115,885 $ -- -- 100,000
Vice President, Sales and Marketing . 2002 $130,039 $ 25,000 (5) -- 100,000 $ 1,062
Richard Langman ..................... 2002-S $118,728 $ -- -- 60,000
Vice President, Ceramic Products and 2002 $244,731 $ -- -- 45,000 $ 7,369
President of Trans-Tech, Inc. ....... 2001 $223,846 -- 42,000 $ 5,169
2000 $223,269 $ 173,000 -- 20,000 $ 63,620(6)
Paul E. Vincent ..................... 2002-S $112,431 $ -- -- 90,000
Vice President and .................. 2002 $226,385 $ -- -- 50,000 $ 8,956
Chief Financial Officer ............. 2001 $217,462 $ -- -- 60,000 $ 9,681
2000 $190,192 $186,400 -- 50,000 $ 8,571
(1) References to 2002-S refer to the period beginning March 29, 2002 and
ending September 27, 2002. References to the Company's 2002, 2001 and 2000
fiscal years refer to the fiscal years of Alpha ended March 31, 2002,
April 1, 2001 and April 2, respectively. In connection with the Merger on
June 25, 2002, the Company changed its fiscal year-end from the Sunday
closest to March 31 to the Friday closest to September 30.
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Skyworks Solutions, Inc. and Subsidiaries
(2) "All Other Compensation" includes service awards and the Company's
contributions to the executive officer's 401(k) plan account (including
contributions for the fourth quarter of each fiscal year, which were
included in the year of accrual but not distributed until the subsequent
fiscal year).
(3) Mr. Barber joined the Company as an executive officer in connection with
the Merger on June 25, 2002. Prior to June 25, 2002, Mr. Barber was an
executive officer of Washington/Mexicali. References to the fiscal year
for Mr. Barber refer to the fiscal year of Skyworks ending September 27,
2002 and the prior fiscal years of Washington/Mexicali ended September
2001, and September 2000.
(4) Includes Washington/Mexicali's and Skyworks' contributions to the
executive officer's 401(k), and a $21,154 cashout of accrued vacation.
(5) In connection with his joining the Company in July 2001, Mr. Griffin
received a sign-on bonus and a grant of Company stock options.
(6) Includes $42,384 for relocation expenses paid to Mr. Langman during 2000.
The following tables provide information about stock options granted and
exercised by each of the Named Executives in fiscal 2002 and the value of
options held by each at September 27, 2002:
OPTION GRANTS IN LAST FISCAL YEAR
Number of Percent of Potential Realizable
Securities Total Value at Assumed
Underlying Options Exercise Annual Rates of Stock
Options Granted to or Base Price Appreciation for
Granted Employees in Price Expiration Option Term
Name (#) Fiscal Year ($ / Share) Date 5% 10%
- ---- --- ----------- ----------- ---- -- ---
David J. Aldrich 175,000 5.13 $12.65 4/25/2012 $1,392,215 $3,528,147
300,000 8.80 $ 4.99 6/26/2012 $ 941,455 $2,385,832
Kevin D. Barber 75,000 2.20 $ 4.99 6/26/2012 $ 235,364 $ 596,458
Liam K. Griffin 50,000 1.47 $12.65 4/25/2012 $ 397,776 $1,008,042
50,000 1.47 $ 4.99 6/26/2012 $ 156,909 $ 397,639
Richard Langman 45,000 1.32 $12.65 4/25/2012 $ 357,998 $ 907,238
15,000 0.44 $ 4.99 6/26/2012 $ 47,073 $ 119,292
Paul E. Vincent 50,000 1.47 $12.65 4/25/2012 $ 397,776 $1,008,042
40,000 1.17 $ 4.99 6/26/2012 $ 125,527 $ 318,111
The options vest at a rate of 25% per year commencing one year after the date of
grant, provided the holder of the option remains employed by the Company.
Options may not be exercised beyond three months after the holder ceases to be
employed by the Company, except in the event of termination by reason of death,
retirement or permanent disability, in which event the option may be exercised
for specific periods not exceeding one year following termination. The assumed
annual rates of stock price appreciation stated in the table are dictated by
regulations of the Securities and Exchange Commission, and are compounded
annually for the full term of the options; actual outcomes may differ.
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Skyworks Solutions, Inc. and Subsidiaries
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
Number of Securities Value of Unexercised
Shares Underlying In-The-Money
Acquired On Value Unexercised Options at Options at
Exercise Realized September 27, 2002 (#) September 27, 2002 ($)
--------------------------- ----------------------------
(#) ($) Exercisable Unexercisable Exercisable Unexercisable
--- --- ----------- ------------- ----------- -------------
David J. Aldrich -- $ -- 256,000 733,000 $ 116,736 $ 14,670
Kevin D. Barber -- $ -- 44,694 126,609 $ -- $ --
Liam K. Griffin -- $ -- 25,000 175,000 $ -- $ --
Richard Langman -- $ -- 156,250 122,750 $ 272,000 $ --
Paul E. Vincent -- $ -- 88,500 189,500 $ 52,704 $ 11,736
The values of unexercised options in the foregoing table are based on the
difference between the $4.77 closing price of Skywork's common stock at
September 27, 2002, the end of the 2002 fiscal year, on the Nasdaq National
Market, and the respective option exercise price.
EXECUTIVE COMPENSATION
Our executives are eligible for awards of nonqualified stock options, incentive
stock options and restricted stock awards under our applicable stock option
plans. These stock options plans are administered by the Compensation Committee
of the Board of Directors. Generally, the exercise price at which an executive
may purchase Skyworks' common stock pursuant to a stock option is the fair
market value of Skyworks' common stock on the date of grant. Stock options are
granted subject to restrictions on vesting, with equal portions of the total
grant generally vesting over a period of four years. Our stock options are
subject to forfeiture (after certain grace periods) upon termination of
employment, retirement, disability or death. Restricted stock awards involve the
issuance of shares of common stock which may not be transferred or otherwise
encumbered, subject to certain exceptions, for varying amounts of time, and
which will be forfeited, in whole or in part, if the executive terminates his or
her employment with Skyworks. No restricted stock awards were made in fiscal
2002; stock option grants to the Named Executives during the fiscal year are
discussed above under the caption "Option Grants in Last Fiscal Year".
Senior executives of the Company are also eligible to receive target incentive
compensation under which a percentage of each executive's total cash
compensation is tied to the accomplishment of specific financial objectives
during the 2002 fiscal year. As a result of a challenging economic and business
environment during the fiscal year, the Company did not achieve the annual
performance targets set by the Board“Compensation of Directors, and no incentive bonuses were
paid to senior executives with respect to fiscal 2002. Senior executives also
may participate in the Company's Executive Compensation Plan (the "Executive
Compensation Plan"), an unfunded, non-qualified deferred compensation plan,
under which participants may defer a portion of their compensation. Deferred
amounts are held in a trust. Participants defer recognizing taxable income on
the amount held for their benefit until the amounts are paid. The Company, in
its sole discretion, may make additional contributions to the accounts of
participants. Participants normally receive the deferred amounts upon
retirement. Special rules are provided for distributions in the case of a
participant's death or disability, a change in control of the Company, early
retirement, and unforeseen emergencies. The Named Executives each participated
in the Executive Compensation Plan during the 2002 fiscal year. The Company did
not make any discretionary contributions to their accounts during fiscal 2002.
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Skyworks Solutions, Inc. and Subsidiaries
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is responsible for
developing and making recommendations with respect to executive compensation.
The Compensation Committee determines the compensation to be paid to the Chief
Executive Officer of Skyworks and each of the Company's executives who report
directly to him (the "Senior Executives").
The objective of the Compensation Committee in determining the type and amount
of executive compensation is to provide a level of compensation that allows
Skyworks to attract and retain superior talent, to achieve its business
objectives, and to align the financial interests of the Senior Executives with
the stockholders of Skyworks. The elements of compensation for the Senior
Executives are base salary, short-term cash incentives, long-term stock-based
incentives and retirement plans.
Compensation for Skyworks' Chief Executive Officer and the other Senior
Executives, including salary and short- and long-term incentives, is established
at levels competitive with the compensation of comparable executives in similar
companies. The Compensation Committee periodically utilizes studies from
independent compensation experts on executive compensation in comparable high
technology and semiconductor companies. Based on these studies, the Compensation
Committee establishes base salaries, and target incentive bonuses and stock
option compensation, so as to set the combined value near the median of the
range indicated by the studies. In establishing individual compensation, the
Compensation Committee considers the individual experience and performance of
the executive, as well as the performance of Skyworks. The Compensation
Committee also considers the recommendations of the Chief Executive Officer
regarding the salaries of the other Senior Executives.
Short-term incentive compensation for each Senior Executive is established
annually by the Compensation Committee, by tying a portion of each Senior
Executive's total cash compensation to the accomplishment of specific financial
objectives. The Compensation Committee established aggressive forward-looking
incentive targets for Skyworks' Senior Executives for fiscal 2002. As a result
of a challenging business environment in that time period, the Company did not
achieve these targets. Taking this and other factors into account, no short-term
incentive compensation was awarded to Skyworks' Senior Executives for fiscal
2002.
Long-term, stock-based compensation has been provided to Senior Executives under
Skyworks' long-term incentive plan ("the LTIP"). Under the LTIP, the
Compensation Committee has, in the past, awarded nonqualified stock options, and
incentive stock options. It also has the ability to offer restricted stock
awards. Restricted stock awards involve the issuance of shares of common stock
that may not be transferred or otherwise encumbered, subject to certain
exceptions, for varying amounts of time, and which will be forfeited, in whole
or in part, if the employee terminates his or her employment with Skyworks.
These programs are intended to tie the value of the Senior Executive's
compensation to the long-term value of Skyworks' common stock.
Skyworks also permits executives and other employees to purchase Skyworks common
stock at a discount through the Company's Employee Stock Purchase Plan.
Skyworks' executives may also participate in the Company's 401(k) Plan, under
which Skyworks' employer contribution has in recent years been made in the form
of Skyworks common stock.
The stock ownership afforded under the LTIP, the Employee Stock Purchase Plan
and the 401(k) Plan encourages Skyworks' executives to acquire, long-term stock
ownership positions, and helps to align the executives' interests with
stockholders' interests.
A final component of executive compensation provides executives with a means to
defer recognition of income. Executives designated by the Compensation Committee
may participate in the Skyworks Executive Compensation Plan, which is discussed
under "Executive Compensation Plan"” appearing in the Proxy Statement.
The Compensation Committee established the compensation of Mr. Aldrich,
President and Chief Executive Officer, under the same criteria used to determine
the compensation of the other Senior Executives, as described above. Mr.
Aldrich's compensation was linked to Skyworks' performance during the fiscal
yearStatement, is incorporated herein by structuring a substantial portion of his compensation in the form of
stock options and a target incentive bonus based on the accomplishment of
specific financial objectives. Mr. Aldrich's total compensation plan for fiscal
2002 was in the middle range of those for chief executive officers of similar
companies, according to studies prepared by independent compensation
consultants. During fiscal 2002, Mr. Aldrich received a salary of $360,000 and
options to purchase 475,000 shares of common stock at the fair market value of
Skyworks common stock on the dates of the option grants. As a result of the
challenging business environment that persisted during the fiscal year, Skyworks
did not exceed the performance targets that the Board had established in Mr.
Aldrich's compensation plan, and no incentive bonus was awarded to Mr. Aldrich
for fiscal 2002.
Section 162(m) of the Internal Revenue Code limits the tax deductibility by a
publicly held corporation of compensation in excess of $1 million paid to
certain of its executive officers. However, this deduction limitation does not
apply to certain "qualified performance-based compensation" within the meaning
of the Internal Revenue Code and the regulations promulgated thereunder. The
Compensation Committee has considered the limitations on deductions imposed by
Section 162(m), and it is The Compensation Committee's intention to structure
executive compensation to minimize the application of the deduction limitations
of Section 162(m) insofar as consistent with the Compensation Committee's
overall compensation objectives.
Based on the recommendations of the Compensation Committee, Skyworks has entered
into severance agreements with certain Senior Executives. Such agreements do not
guarantee salary, position or benefits, but provide salary continuation and
other benefits in the event of a termination after a change in control or
certain other terminations, as described under the heading "Employment and
Severance Agreements" in this Form 10-K.
THE COMPENSATION COMMITTEE
Donald R. Beall, Chairman
Timothy Furey
COMPENSATION OF DIRECTORS
Directors who are not employees of Skyworks are paid a quarterly retainer of
$7,500 plus an additional $1,000 for each Board meeting attended in person or
$500 for each Board meeting attended by telephone. Directors who serve as
chairman of a committee of the Board of Directors receive an additional
quarterly retainer of $625, and those who serve on a committee but are not
chairman receive an additional quarterly retainer of $312.50. In addition, each
new non-employee director receives an option to purchase 45,000 shares of common
stock immediately following the earlier of Skyworks' Annual Meeting of
Stockholders at which the director is first elected by the stockholders or
following his initial appointment by the Board of Directors. In addition,
following each Annual Meeting of Stockholders each director who is continuing in
office or re-elected receives an option to purchase 15,000 shares of common
stock. The exercise price of stock options granted to directors is the fair
market value on the day of grant. During fiscal 2001 and prior years, option
grants to directors were made from the 1994 and 1997 Non-Qualified Stock Option
Plans for Non-Employee Directors. Stock option grants to directors for fiscal
2002 were made under the 2001 Directors' Stock Option Plan. Non-employee
directors of the Company are also eligible to receive option grants under the
Company's 1996 Long-Term Incentive Plan.
In connection with the Merger and their appointment to the Board of Directors,
each of Messrs. Beall, Beguwala, Decker and Iyer were granted an option to
purchase 45,000 shares of common stock on June 25, 2002 at the fair market value
thereof under our Directors' 2001 Stock Option Plan.
In connection with the Merger and their continued service on the Board of
Directors, each of Messrs. Furey, Leonard and McLachlan were granted an option
to purchase 45,000 shares of common stock on August 1, 2002 at the fair market
value thereof under our 1996 Long-Term Incentive Plan. Messrs. Furey, Leonard
and McLachlan were not granted any options to purchase shares of common stock
under our Directors' 2001 Stock Option Plan during the fiscal year ended
September 27, 2002.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company does not have any employment agreements with any of the Named
Executives. The Company has severance agreements with the Messrs. Aldrich,
Langman and Vincent under which each is entitled to receive various benefits in
the event that his employment is terminated within two years after a change in
control of Alpha, or if his employment is terminated by Alpha at any time
without good cause. In these cases, the officer will receive two years of salary
continuation, and all of the officer's stock options will vest immediately. Mr.
Aldrich's severance agreement provides that he is also entitled to various
benefits in the event he voluntarily terminates his employment for certain
reasons. The term of these agreements is indefinite.
STOCK PERFORMANCE GRAPH
The following graph shows the change in Skyworks' cumulative total stockholder
return for the last five fiscal years, based upon the market price of Skyworks'
common stock, compared with: (i) the cumulative total return on the Standard &
Poor's 500 Index and (ii) the Standard & Poor's 500 Semiconductor Index. The
graph assumes a total initial investment of $100 as of September 27, 1997, and
shows a "Total Return" that assumes reinvestment of dividends, if any, and is
based on market capitalization at the beginning of each period.
[TOTAL SHAREHOLDER RETURNS LINE GRAPH]
71
Skyworks Solutions, Inc. and Subsidiaries
ANNUAL RETURN PERCENTAGE TABLE
Years Ended September 30,
Company/Index 1998 1999 2000 2001 2002
------------- ---- ---- ---- ---- ----
Skyworks Solutions, Inc. (38.5) 643.8 20.8 (43.1) (76.6)
S&P 500 Index (9.1) 27.8 13.3 (26.6) (20.5)
S&P 500 Semiconductors (13.3) 93.5 31.3 (60.1) (36.4)
INDEXED RETURNS TABLE
Years Ended September 30,
Company/Index Base Period
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
Skyworks Solutions, Inc. 100 61.5 457.4 552.4 314.1 73.5
S&P 500 Index 100 109.1 139.4 157.9 115.9 92.1
S&P 500 Semiconductors 100 86.7 167.8 220.2 86.5 55.0
The stock price information shown on the above stock performance graph, annual
return percentage table and indexed returns table are not necessarily indicative
of future price performance. Information used on the graph and in the tables was
obtained from Standard & Poor's, a source believed to be reliable, but the
Company is not responsible for any errors or omissions in such information.
Skyworks' common stock is traded on the Nasdaq National Market under the symbol
"SWKS". Prior to June 25, 2002 Skyworks' common stock was traded on the Nasdaq
National Market under the symbol "AHAA".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Mr. Beall and
Mr. Furey, each of whom are outside directors. 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. During the last fiscal year, none of
the Company's executive officers served as:
- a member of the compensation committee (or other committee of the
board of directors performing equivalent functions or, in the
absence of any such committee, the entire board of directors) of
another entity, one of whose executive officers served on the
Compensation Committee of the Company;
- a director of another entity one of whose executive officers served
on the Compensation Committee of the Company; or
- a member of the compensation committee (or other committee of the
board of directors performing equivalent functions or, in the
absence of any such committee, the entire board of directors) of
another entity, one of whose executive officers served as a director
of the Company.
72
Skyworks Solutions, Inc. and Subsidiaries
reference.
ITEM 1212. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the beneficial ownership of the Company's common
stock as of December 04, 2002 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 December 4, 2002; (ii) the Named Executives; (iii)
each director and nominee for director; and (iv) all current executive officers
and directors of the Company, as a group.
Beneficial ownership is determined in accordance with the rules of the SEC. As
of December 4, 2002, there were 137,899,732 shares of Skyworks common stock
issued and outstanding.
In computing the number of shares of Company common stock beneficially owned by
a person and the percentage ownership of that person, shares of Company common
stock that will be subject to options held by that person that are currently
exercisable or that are exercisable within 60 days of January 10, 2002 are
deemed outstanding. These shares are not, however, deemed outstanding
Except for the purpose of computinginformation concerning equity compensation plans, the percentage ownership of any other person.
EQUITY COMPENSATION PLAN INFORMATION
The Company maintains nine equity compensation plans under which our equity securities are authorized for issuance to our employees and/or directors:
- -
— the 1986 Long-Term Incentive Plan;
- -
— the 1994 Non-Qualified Stock Option Plan;
- -
— the 1996 Long-Term Incentive Plan;
- -
— the 1997 Non-Qualified Stock Option Plan;
- -
— the 1999 Employee Long-Term Incentive Plan;
- -
— the Directors'Directors’ 2001 Stock Option Plan;
- -
— the Non-Qualified Employee Stock Purchase Plan;
- -
— the 2002 Employee Stock Purchase Plan; and
- -
— the Washington Sub, Inc. 2002 Stock Option Plan.
Except for the Non-Qualified Employee Stock Purchase Plan, the 2002 Employee
Stock Purchase Plan, the 1999 Employee Long-Term Incentive Plan, and 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.
The following table presents information about these plans as of September 27, 2002.
30, 2003.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | ||||
|---|---|---|---|---|---|---|---|
| Equity compensation | |||||||
| plans approved by | |||||||
| security holders | 8,691,510 | $ 16 | .45 | 1,834,897 | |||
| Equity compensation | |||||||
| plans not approved by | |||||||
| security holders | 17,071,976 | $ 14 | .93 | 12,348,938 | |||
| Total | 25,763,523 | $ 15 | .44 | 14,183,835 | |||
| (1) | No further grants will be made under the 1986 Long-Term Incentive Plan, the 1994 Non-Qualified Stock Option Plan and the 1997 Non-Qualified Stock Option Plan. |
| (2) | No further grants may be made under the Washington Sub Inc. 2002 Stock Option Plan. (3) Includes 14,351,737 options held by non-employees (excluding directors). |
1999 EMPLOYEE LONG-TERM INCENTIVE PLAN
The purposes of the Company'sCompany’s 1999 Employee Long-term Incentive Plan (the "1999“1999 Employee Plan"Plan”) are (i) to provide long-term incentives and rewards to those employees of the Company and its subsidiaries, other than officers and non-employee directors, who are in a position to contribute to the long-term success and growth of the Company and its subsidiaries, (ii) to assist the Company in retaining and attracting employees with requisite experience and ability, and (iii) to associate more closely the interests of such employees with those of the Company'sCompany’s stockholders. The 1999 Employee Plan provides for the grant of non-qualified stock options to purchase shares of the Company'sCompany’s common stock. The term of these options may not exceed ten years. The 1999 Employee Plan contains provisions which permit restrictions on vesting or transferability, as well as continued exercisability upon a participant'sparticipant’s termination of employment with the Company, of options granted thereunder. The 1999 Employee Plan provides for full acceleration of the vesting of options granted thereunder upon a "change“change in control"control” of the Company, as defined in the 1999 Employee Plan. The Board of Directors generally may amend, suspend or terminate the 1999 Employee Plan in whole or in part at any time; provided that any amendment which affects outstanding options be consented to by the holder of the options.
WASHINGTON SUB, INC. 2002 STOCK OPTION PLAN
The Washington Sub, Inc. 2002 Stock Option Plan (the "Washington“Washington Sub Plan"Plan”) became effective on June 25, 2002 in connection with the Merger. At the time of the spin-off of Conexant'sConexant’s wireless business, outstanding Conexant options granted pursuant to certain Conexant stock incentive plans were adjustedconverted so that following the spin-off and Merger each holder of athose certain Conexant optionoptions held (i) options to purchase shares of Conexant common stock and (ii) options to purchase shares of Skyworks common stock. The purpose of the Washington Sub Plan is to provide a means for the Company to perform its obligations with respect to these adjustedconverted stock options. The only participants in the Washington Sub Plan are those persons who, at the time of the Merger, held outstanding options granted pursuant to certain Conexant stock option plans. No further options to purchase shares of Skyworks common stock will be granted under the Washington Sub Plan. The Washington Sub Plan contains a number of sub-plans, which contain terms and conditions that are applicable to certain portions of the options subject to the Washington Sub Plan, depending upon the Conexant stock option plan from which the Skyworks options granted under the Washington Sub Plan were derived. The outstanding options under the Washington Sub Plan generally have the same terms and conditions as the original Conexant options from which they are derived. Most of the sub-plans of the Washington Sub Plan contain provisions related to the effect of a participant'sparticipant’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 & 2002 ESPP
The Company also maintains a Non-Qualified Employee Stock Purchase Plan and a
2002 Employee Stock Purchase Plan to provide employees of the Company and participating subsidiaries with an opportunity to acquire a proprietary interest in the Company through the purchase, by means of payroll deductions, of shares of the Company'sCompany’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 plans,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. The Company intends to seek approval for its 2002 Employee
Stock Purchase Plan at its next Annual Meeting of Stockholders.
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Skyworks Solutions, Inc. and Subsidiaries
ITEM 1313. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Skyworks was formed through the Merger of the wireless communications business
of Conexant, which it spun-off immediately prior
The information required by this Item 13 is hereby incorporated by reference to the Merger, with Alpha. Company's Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Merger was completed on June 25, 2002. Immediately following the Merger,
Skyworks purchased the Mexicali Operations from Conexant for an aggregate
purchase price of $150 million. Following the Merger, Alpha changed its
corporate name to Skyworks Solutions, Inc.
In connection with the Merger, Skyworks and Conexant have engaged in various
transactions, including, without limitation, the transactions referred to
elsewhere in this annual report andinformation in the consolidated financial statementssection entitled “Audit Fees and related notes thereto of Skyworks contained herein. Skyworks also has
established ongoing arrangements and agreements with Conexant, the more
significant of which are described below.
FINANCING ARRANGEMENTS AND SENIOR NOTES
In connection with our acquisition from Conexant of the Mexicali Operations, we
and certain of our subsidiaries entered into a financing agreement, dated as of
June 25, 2002, with Conexant. Pursuant to the terms of the financing agreement,
in payment for the Mexicali Operations, we and certain of our subsidiaries,
issued short-term promissory notes to ConexantServices,” appearing in the aggregate principal amount
of $150 million. In addition, Conexant made a short-term $100 million loan
facility available to us under the financing agreement to fund working capital
and other requirements. $75 million of this facility became available on or
after July 10, 2002, and the remaining $25 million balance of the facility would
have become available if we had more than $150 million of eligible domestic
receivables. Interest on the short-term promissory notes and the loan facility
was payable at a rate of 10% per annum for the first ninety days following June
25, 2002, 12% per annum for the next ninety days and 15% per annum thereafter.
Unless paid earlier at the option of the Company or pursuant to mandatory
prepayment provisions contained in the financing agreement with Conexant, fifty
percent of the principal of the short-term promissory notes would become due on
March 24, 2003 and the remaining fifty percent, as well as the entire principal
amount of any amounts borrowed under the loan facility, would become due on June
24, 2003. There were $30 million of borrowings as of September 27, 2002 under
this facility. The promissory notes and the loan facility were securedProxy Statement, is incorporated herein by our
assets and properties.
Pursuant to our private placement of $230 million aggregate principal amount of
4.75% convertible subordinated notes due in 2007, which closed on November 12,
2002, we and Conexant entered into a refinancing agreement, and we, certain of
our subsidiaries and Conexant executed an amendment to the original financing
agreement with Conexant, each dated as of November 6, 2002. Pursuant to the
refinancing agreement and the amended financing agreement, of the net cash
proceeds received from the private placement, we paid Conexant (i) $105 million
to prepay, in part, the short-term promissory notes issued to Conexant, leaving
a principal balance of $45 million due on such notes, and (ii) $65 million to
prepay in full and retire the loan facility. Upon retiring the loan facility,
all security interests, liens and mortgages presently held by Conexant on our
assets and properties were released, and the financing agreement with Conexant,
as amended, was terminated.
The remaining $45 million principal amount of the short-term promissory notes
was exchanged for an interim 15% convertible debt security with a maturity date
of June 30, 2005. This debt security was then promptly exchanged for an equal
principle amount of 15% convertible senior subordinated notes due June 30, 2005,
issued under an indenture entered into by us and Wachovia Bank, National
Association, as trustee (the "Senior Notes"). We may redeem the Senior Notes in
whole or in part, at any time after May 12, 2004, subject to a redemption
premium of 3% of the then outstanding principal amount thereof. Under the terms
of the Senior Notes, Conexant has the right to convert the outstanding principal
amount thereof (or any portion thereof) into a number of shares of our common
stock equal to the principal amount of the Senior Notes to be so converted,
divided by the applicable conversion price, as determined pursuant to the terms
of the Senior Notes. Upon maturity, the Senior Notes are payable in shares of
our common stock based on the applicable conversion price as of the maturity
date, although interest on the Senior Notes, as well as the outstanding
principal if certain events of default occur, is payable by us in cash. The
initial conversion price of the Senior Notes is $7.87 per share, subject to
adjustment as follows. In the event that the market price of our common stock is
generally below the applicable conversion price, the holders of the Senior Notes
would be entitled to receive upon conversion of the Senior Notes shares of our
common stock in an amount equal to the principal amount of the Senior Notes
being converted divided by the market price of our common stock, provided that
in no event will the number of shares issued exceed 125% of the number of shares
that the holders would have received at the conversation price. The conversion
price is also subject to adjustment pursuant to anti-dilution provisions.
We also entered into a registration rights agreement with Conexant, which will
provide for the registration under the Securities Act of 1933, as amended, of
the resale by Conexant (or any transferee thereof) of the Senior Notes and the
shares of our common stock underlying the Senior Notes. We have agreed to
maintain the registration statement contemplated by the registration rights
agreement effective and available for use until December 31, 2005, subject to
certain limitations.
TAX ALLOCATION AGREEMENT
At the time of the Merger, we entered into a tax allocation agreement with
Conexant, which provides for the allocation of all responsibilities, liabilities
and benefits relating to or affecting all forms of taxation between us and our
affiliates and Conexant and its affiliates. In general, Conexant assumed and is
responsible for tax liabilities of the wireless business for periods prior to
the Merger and we assumed and are responsible for tax liabilities of the
wireless business for periods after the Merger. Subsequent to the execution of
the tax allocation agreement, and in connection with the refinancing agreement
and amended financing agreement with Conexant, we entered into a letter
agreement on November 6, 2002 with Conexant that amends the tax allocation
agreement to limit our indemnification obligations under the tax allocation
agreement to a reduced set of circumstances that could trigger such
indemnification. However, the tax allocation agreement continues to provide that
we will be responsible for various other tax obligations and for compliance with
various representations and covenants made under the tax allocation agreement.
TRANSITION SERVICES AGREEMENT
In connection with the Merger, we entered into a transition services agreement
with Conexant on June 25, 2002 under which we and Conexant will provide to the
other certain specified services, most of which run through December 31, 2002,
subject to extension by mutual agreement. The services provided by Conexant
under the agreement include:
- accounting and payroll;
- finance and treasury;
- engineering and design services;
- platform technology and other support for our Newbury Park facility;
- human resources;
- information technology;
75
Skyworks Solutions, Inc. and Subsidiaries
- sales;
- other support services, including global trade, shipping, storage
and logistics services;
- manufacturing quality and reliability;
- facilities; and
- material management and printed wire board assembly services.
In addition, we will provide certain services to Conexant, including services
related to:
- engineering and design services for Conexant's broadband access
products;
- human resources;
- product testing and package qualification consulting; and
- facilities, including environmental consulting services.
The price to be paid by us and Conexant for these services is generally based on
the actual cost of providing such services, including out of pocket expenses.
INFORMATION TECHNOLOGY SERVICES AGREEMENT
On June 25, 2002, in connection with the Merger, we entered into an information
technology service agreement with Conexant under which Conexant provides to us a
variety of information technology services that Conexant previously provided to
its wireless communications division. These services generally are to be
provided in six month increments until either party elects to terminate the
agreement or certain specific services are provided thereunder. Payments to
Conexant for the services rendered under the agreement generally consist of a
base fee per month, plus an additional monthly service fee depending on the
particular services rendered by Conexant. We and Conexant have agreed to review
the fee structure each year during the term of the agreement.
The services provided by Conexant under the agreement include:
- data center operations management;
- remote-site support;
- information technology infrastructure services;
- programming services; and
- applications support.
MEXICALI TRANSITION SERVICES AGREEMENT
Under a mexicali transition services agreement dated as of June 25, 2002 with
Conexant, we and Conexant will provide certain transition services to each other
with respect to the Mexicali Operations. These services generally will be
provided until December 31, 2002, unless otherwise mutually agreed. The price
for the services will be the actual cost, including out-of pocket expenses, of
providing the services. The services covered under the agreement include:
- general accounting support;
- metrology services and test equipment support;
- thermal mechanical analysis and measurement of packages;
- electrical analysis and measurement for packages; and
- electromagnetic impulse measurement and certification services.
NEWPORT BEACH SUPPLY AGREEMENT
Under our Newport Beach wafer supply and services agreement entered into with
Conexant on June 25, 2002, we will obtain through Conexant silicon-based
semiconductor products supplied by Jazz Semiconductor, Inc., a Newport Beach,
California foundry joint venture between Conexant and The Carlyle Group to which
Conexant contributed its Newport Beach wafer fabrication facility. These
services will be provided for a three-year period. Pursuant to the terms of this
supply agreement with Conexant, we are committed to obtain a minimum level of
service from Jazz Semiconductor, Inc., based on a contractual agreement between
Conexant and Jazz Semiconductor. The volume for wafers during these three years
has been pre-calculated based on our anticipated wafer fabrication needs. The
pricing under the agreement is established at Conexant's cost for the first
year, at the median of Conexant's cost and market price for the second year, and
at market price for the third year. Our expected minimum purchase obligations
under this supply agreement are anticipated to be approximately $64 million, $39
million and $13 million in fiscal 2003, 2004 and 2005, respectively. We estimate
that our obligation under this agreement will result in excess costs of
approximately $5.1 million and we have recorded this liability in the current
period.
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Skyworks Solutions, Inc. and Subsidiaries
NEWBURY PARK SUPPLY AGREEMENT
Under a Newbury Park wafer supply and services agreement entered into with
Conexant on June 25, 2002, we will provide services to Conexant for both
production and prototypes of semiconductor products at our Newbury Park,
California wafer fabrication facility, including services related to:
- semiconductor wafer fabrication;
- semiconductor wafer probe;
- final test; and
- die processing.
These services generally will be provided for a term of three years with
additional one-year renewal terms as may be mutually agreed. The pricing for
wafers has been fixed for the three years based on our mutual agreement, and is
based on cost plus 50% markup.
MEXICALI SUPPLY AGREEMENT
Under a Mexicali device supply and services agreement entered into with Conexant
on June 25, 2002, we will provide Conexant with certain semiconductor
processing, packaging and testing services, including:
- assembly services;
- final testing;
- post-test processing; and
- shipping.
During the term of the agreement, Conexant will have the right to purchase
products manufactured through the use of technologies developed and qualified
for full-scale production at the Mexicali facility at the time of the agreement
and, upon mutual agreement, products manufactured through the use of any new
technologies in development at the Mexicali facility at the time of the
agreement, but not yet qualified for full scale production. These services will
be performed at our Mexicali, Mexico facility and, upon mutual agreement, at
other facilities approved by Skyworks. These services generally will be provided
for a term of three years with additional one-year renewal terms as may be
mutually agreed. The pricing for the first year has been fixed based generally
on the yielded assembly cost of the particular materials. The pricing for the
second year will either be a result of: (i) a 5% reduction from year one, or
(ii) the actual cost at the end of year one. Pricing for the third year will be
negotiated between the parties.
RELATED PARTY TRANSACTIONS OF THE COMPANY
As part of the terms of the Merger, four designees of Conexant - Messrs. Beall,
Beguwala, Decker and Iyer - were appointed to the Skyworks Board of Directors,
joining four members who had been serving on the Board having been previously
elected by the stockholders of Alpha. Each of the four Conexant designees to the
Board continues to have a business relationship with Conexant. Mr. Decker
currently serves as the chief executive officer, as well as the chairman of the
board, of Conexant. Mr. Iyer serves as senior vice president and chief financial
officer of Conexant. Mr. Beguwala is a current employee, as well as a former
executive officer, of Conexant. Mr. Beall is a non-employee director of
Conexant.
Information concerning severance agreements with the Named Executives and
certain option grants made to directors of the Company is described at Item 11,
above. There are no other relationships or transactions reportable under the
regulations of the Securities and Exchange Commission.
reference.
PART IV
ITEM 14 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including
our President and Chief Executive Officer and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as
of a date (the "Evaluation Date") within 90 days prior to the filing date of
this report. Based upon that evaluation, the President and Chief Executive
Officer and Chief Financial Officer concluded that, as of the Evaluation Date,
our disclosure controls and procedures were effective in timely alerting them to
the
77
Skyworks Solutions, Inc. and Subsidiaries
material information relating to us (or our consolidated subsidiaries) required
to be included in our periodic SEC filings. In designing and evaluating the
disclosure controls and procedures, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of our evaluation.
ITEM 1515. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements
The financial statements filed as part of this report are listed on the index appearing on page 37.43.
2. Index to Financial Statement Schedules
The following financial statement schedule is filed as part of this report (page reference is to this report):
Schedule II Valuation and Qualifying Accounts...............Page 87Accounts................................................Page 86
All other required schedule information is included in the Notes to Consolidated Financial Statements or is omitted because it is either not required or not applicable.
3. Exhibits
| No. | Description | |
|---|---|---|
| 2.a 2.b 2.c 2.d 2.e 3.a 3.b 4.a 4.b 4.c 4.d 4.e 4.f 4.g 10.a 10.b 10.c 10.d 10.e 10.f 10.g 10.h 10.i 10.j 10.k 10.l 10.m 10.n 10.o 10.p 10.q 10.r 10.s 10.t 10.u 10.v 10.w 10.x 10.y 10.z 10.aa 10.bb 10.cc 11 16 21 23.a 23.b 31.a 31.b 32 | Agreement and Plan of Reorganization, dated as of December 16, 2001, as amended as of April 12, 2002, by and among the Company, Washington Sub, Inc. and Conexant Systems, Inc. Contribution and Distribution Agreement, dated as of December 16, 2001, as amended as of June 25, 2002, by and between Washington Sub, Inc. the Company and Conexant Systems, Inc. Mexican Stock Purchase Agreement, dated as of June 25, 2002, by and between the Company and Conexant Systems, Inc. Amended and Restated Mexican Asset Purchase Agreement, dated as of June 25, 2002, by and between the Company and Conexant Systems, Inc. U.S. Asset Purchase Agreement, dated as of December 16, 2001 by and between the Company and Conexant Systems, Inc. Amended and Restated Certificate of Incorporation Second Amended and Restated By-laws Specimen Certificate of Common Stock (1) Loan and Security Agreement, dated December 15, 1993, by and between Trans-Tech, Inc. and County Commissioners of Frederick County Indenture, dated as of November 12, 2002, by and between the Company and State Street Bank and Trust Company (as Trustee) Form of 4.75% Convertible Subordinated Note of the Company |
* Management contract or compensatory plan
**
** Filed herewith
+ Confidential Treatment requestedtreatment granted for certain portions of this Agreementagreement which have been omitted and filed separately with the Securities and Exchange Commission.
(1) Incorporated by reference to the exhibit filed with our Registration
Statement on Form S-3 filed on July 15, 2002 (File No. 333-92394).
(2) Incorporated by reference to the exhibit filed with our Quarterly
Report on Form 10-Q for the fiscal quarter ended October 2, 1994.
(3) Incorporated by reference to the exhibit filed with our Annual
Report on Form 10-K for the fiscal year ended March 29, 1992.
(4) Incorporated by reference to the exhibit filed with our Quarterly
Report on Form 10-Q for the fiscal quarter ended June 27, 1993.
(5) Incorporated by reference to the exhibit filed with our Annual
Report on Form 10-K for the fiscal year ended April 2, 1995.
(6) Incorporated by reference to the exhibit filed with our Quarterly
Report on Form 10-Q for the fiscal quarter ended July 1, 2001.
(7) Incorporated by reference to the exhibit filed with our Annual
Report on Form 10-K for the fiscal year ended April 3, 1994.
(8) Incorporated by reference to the exhibit filed with our Quarterly
Report on Form 10-Q for the fiscal quarter ended September 27, 1998.
(9) Incorporated by reference to the exhibit filed with our Annual
Report on Form 10-K for the fiscal year ended March 29, 1998.
(10) Incorporated by reference to the exhibit filed with our Quarterly
Report on Form 10-Q for the fiscal quarter ended July 3,1994.
(11) Incorporated by reference to the exhibit filed with our Annual
Report on Form 10-K for the fiscal year ended April 1, 2001.
(12) Incorporated by reference to the exhibit filed with our Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2001.
(13) Incorporated by reference to the exhibits filed with our Current
Report on Form 8-K dated November 6, 2002.
(14) Incorporated by reference to the exhibits filed with our Current Report on
Form 8-K dated June 25, 2002.
(15) Incorporated by reference to Annex A filed with our Registration Statement
on Form S-4, as amended, filed on May 10, 2002 (File No. 333-83768).
(16) Incorporated by reference to exhibit filed with our Registration Statement
on Form S-3 filed on July 15, 2002 (File No. 333-92394).
(17) Incorporated by reference to the exhibit filed with our Registration
Statement on Form S-3 filed on August 30, 2002 (File No. 333-99015).
(18) Incorporated by reference to the exhibit filed with our Annual Report on
Form 10-K for the fiscal year ended March 30, 1997.
(19) Incorporated by reference to the exhibit filed with our Registration
Statement on Form S-4, as amended, filed on May 3, 2002 (File No.
333-83768)
| (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) | Incorporated by reference to the exhibit filed with our Registration Statement on Form S-3 filed on July 15, 2002 (File No. 333-92394). Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 1994 (File No. 001-05560). Incorporated by reference to the exhibit filed with our Annual Report on Form 10-K for the fiscal year ended March 29, 1992 (File No. 001-05560). Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 1993 (File No. 001-05560). Incorporated by reference to the exhibit filed with our Annual Report on Form 10-K for the fiscal year ended April 2, 1995 (File No. 001-05560). Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 2001. Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 1998 (File No. 001-05560). Incorporated by reference to the exhibit filed with our Annual Report on Form 10-K for the fiscal year ended March 29, 1998 (File No. 001-05560). Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the fiscal quarter ended July 3,1994 (File No. 001-05560). Incorporated by reference to the exhibit filed with our Annual Report on Form 10-K for the fiscal year ended April 1, 2001. Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2001. Incorporated by reference to the exhibits filed with our Current Report on Form 8-K dated November 6, 2002. Incorporated by reference to the exhibits filed with our Current Report on Form 8-K dated June 25, 2002. Incorporated by reference to Annex A filed with our Registration Statement on Form S-4, as amended, filed on May 10, 2002 (File No. 333-83768). Incorporated by reference to exhibit filed with our Registration Statement on Form S-3 filed on July 15, 2002 (File No. 333-92394). Incorporated by reference to the exhibit filed with our Registration Statement on Form S-3 filed on August 30, 2002 (File No. 333-99015). Incorporated by reference to the exhibit filed with our Registration Statement on Form S-4, as amended, filed on May 3, 2002 (File No. 333-83768) Incorporated by reference to the exhibit filed with our Annual Report on Form 10-K for the fiscal year ended September 27, 2002. Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 2003. Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 2003. Incorporated by reference to the exhibits filed with our Current Report on Form 8-K dated September 10, 2003. Incorporated by reference to the exhibit filed with our Current Report on Form 8-K dated June 28, 2002. |
(b) Reports on Form 8-K
On June 28, 2002, a Form 8-K was filed which served to announce (i)
the completion of our merger with the wireless communications
division of Conexant Systems, Inc., (ii) the change in our
independent auditors, and (iii) the execution of a financing
arrangement with Conexant Systems, Inc.
On August 15, 2002, a Form 8-K/A was filed which served to amend the
previous filing on June 28, 2002 that announced the completion of
our merger with the wireless communications division of Conexant
Systems, Inc. and which served to announce a change in our fiscal
year.
On November 6, 2002, a Form 8-K was filed which served to
incorporate by reference the Company's press releases dated November
5, 2002 and November 6, 2002 relating to a private placement of
convertible subordinated notes of the Company. The notes are
convertible at the option of the holders into common stock of the
Company at a conversion price of $9.05, subject to adjustment.
On November 8, 2002, a Form 8-K was filed which served to provide
details relating to the Company's private placement of convertible
subordinated notes.
On November 8, 2002, a Form 8-K was filed which served to provide
pro forma consolidated financial information for the nine months
ended June 30, 2002 as if the Merger and the subsequent acquisition
by Skyworks of the Mexicali operation had occurred on October 1,
2001.
On November 12, 2002, a Form 8-K/A was filed which served to amend
the previous filing on November 8, 2002 that provided pro forma
financial information.
80
Skyworks Solutions, Inc. and Subsidiaries
| The Company filed, on July 23, 2003, a current report on Form 8-K furnishing one exhibit: a Press Release announcing the Company’s financial results for the three and nine month periods ended June 27, 2003. |
| The Company filed, on September 9, 2003, a current report on Form 8-K, which served to incorporate by reference the Company’s press releases dated September 8, 2003 and September 9, 2003 relating to the issuance, pricing and sale of an offering of 9,200,000 shares of the Company’s common stock. |
| The Company filed, on September 10, 2003, a current report on Form 8-K which served to incorporate by reference the Terms Agreement dated September 9, 2003 between the Company and Credit Suisse First Boston LLC, relating to the issuance and sale of an offering of 9,200,000 shares of the Company’s common stock. |
| The Company filed, on October 30, 2003, a current report on Form 8-K furnishing one exhibit: a Press Release announcing the Company’s financial results for the three and twelve month periods ended October 3, 2003. |
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K are filed
herewith and incorporated by reference herein. The response to this
portion of Item 15 is submitted under Item 15 (a) (3).
81
Skyworks Solutions, Inc. and Subsidiaries
| The exhibits required by Item 601 of Regulation S-K are filed herewith and incorporated by reference herein. The response to this portion of Item 15 is submitted under Item 15 (a) (3). |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:December 22, 2003
SKYWORKS SOLUTIONS, INC.
BY: /S/ DAVID J. ALDRICH
----------------------------------
DAVID J. ALDRICH, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: December 20, 2002
BY: /S/ PAUL E. VINCENT
----------------------------------
PAUL E. VINCENT, CHIEF FINANCIAL
OFFICER, TREASURER AND SECRETARY
Date: December 20, 2002
83
Skyworks Solutions, Inc. and Subsidiaries
Registrant
| By: /s/ DAVID J. ALDRICH |
| David J. Aldrich |
| Chief Executive Officer |
| President |
| Director |
| By: /s/ PAUL E. VINCENT |
| Paul E. Vincent |
| Chief Financial Officer |
| Treasurer |
| Principal Accounting Officer |
| Secretary |
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Skyworks Solutions, Inc., hereby severally constitute and appoint David J. Aldrich and Paul E. Vincent, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, any amendments to this Annual Report on Form 10-K, and generally to do all things in our names and on our behalf in such capacities to enable Skyworks Solutions, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all the requirements of the Securities Exchange Commission.
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 20, 2002.
22, 2003.
Signature and TitleSignature and Title
| /s/ DWIGHT W. DECKER | /s/ DONALD R. BEALL | |
| Dwight W. Decker | Donald R. Beall | |
| Chairman of the Board | Director | |
| /s/ DAVID J. ALDRICH | /s/ MOIZ M. BEGUWALA | |
| David J. Aldrich | Moiz M. Beguwala | |
| Chief Executive Officer | Director | |
| President and Director | ||
| /s/ PAUL E. VINCENT | /s/ TIMOTHY R. FUREY | |
| Paul E. Vincent | Timothy R. Furey | |
| Chief Financial Officer | Director | |
| Treasurer | ||
| Principal Accounting Officer | ||
| Secretary | ||
| /s/ BALAKRISHNAN S. IYER | ||
| Balakrishnan S. Iyer | ||
| Director | ||
| /s/ THOMAS C. LEONARD | ||
| Thomas C. Leonard | ||
| Director | ||
| /s/ DAVID J. MCLACHLAN | ||
| David J. McLachlan | ||
| Director |
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In
(In thousands)
| Description | Beginning Balance | Charged to Costs and Expenses (1) | Deductions | Other (3) | Ending Balance | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended September 30, 2001 | |||||||||||||
| Allowance for doubtful accounts | $ 3,792 | $ (468 | ) | $ (118 | ) | $ -- | $ 3,206 | ||||||
| Reserve for sales returns | $ 534 | $ 4,055 | $ -- | $ -- | $ 4,589 | ||||||||
| Allowance for excess and obsolete inventories | $ 9,099 | $ 2,286 | (2) | $ -- | $ -- | $11,385 | |||||||
| Year Ended September 30, 2002 | |||||||||||||
| Allowance for doubtful accounts | $ 3,206 | $ (512 | ) | $ (575 | ) | $ (795 | ) | $ 1,324 | |||||
| Reserve for sales returns | $ 4,589 | $ 7,616 | $(7,199 | ) | $ 3,510 | $ 8,516 | |||||||
| Allowance for excess and obsolete inventories | $ 11,285 | $ 6,225 | $(3,092 | ) | $ 6,100 | $20,618 | |||||||
| Year Ended September 30, 2003 | |||||||||||||
| Allowance for doubtful accounts | $ 1,324 | $ 1,156 | $ (501 | ) | $ -- | $ 1,979 | |||||||
| Reserve for sales returns | $ 8,516 | $ 3,624 | $(7,131 | ) | $ -- | $ 5,009 | |||||||
| Allowance for excess and obsolete inventories | $20,618 | $ 9,577 | $(4,890 | ) | $ -- | $25,305 | |||||||
| (1) | Additions charged to costs and expenses in the allowance for doubtful accounts |
| (2) | Amount excludes inventory write-downs of $58.7 million charged to cost of goods sold relating to inventory that was written down to a zero cost basis. |
| (3) | Amounts include Alpha’s allowance for doubtful accounts, reserve for sales returns |
EXHIBIT INDEX
| No. | Description | |
|---|---|---|
| 21 23.a 23.b 31.a 31.b 32 | Subsidiaries of the Consent of KPMG LLP Consent of Deloitte & Touche LLP Certification of CEO - Rule 13A-14(A) or 15D-14(A) Certification of CFO - Rule 13A-14(A) or 15D-14(A) Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |