NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Skyworks Solutions, Inc. together with its consolidated subsidiaries, (“Skyworks” or the “Company”) is an innovator of high performance analog semiconductors. Leveraging core technologies, Skyworks supports automotive, broadband, cellular infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. The Company's portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics.
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures, normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), have been condensed or omitted pursuant to those rules and regulations. However, in management's opinion, the financial information reflects all adjustments, including those of a normal recurring nature necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Company's financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended
September 28, 2012
, filed with the SEC on November 21, 2012 (the "2012 10-K"), as amended by Amendment No. 1 to the 2012 10-K, filed with the SEC on January 28, 2013.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, expenses, comprehensive income and accumulated other comprehensive loss that are reported in these unaudited consolidated financial statements and accompanying disclosures. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Significant judgment is required in determining the recognition and/or disclosure of reserves for and fair value of items such as inventory, income taxes, share-based compensation, loss contingencies, subsequent events, bad debt allowances, contingent consideration, intangible assets associated with business combinations, and overall fair value assessments of assets and liabilities, particularly those classified as Level 2 or Level 3 in the fair value hierarchy. In addition, significant judgment is required in determining whether a potential indicator of impairment of long-lived assets exists and in estimating future cash flows for any necessary impairment tests. Management's estimates could differ significantly from actual results.
The Company has evaluated subsequent events through the date of issuance of these unaudited consolidated financial statements.
The Company's fiscal year ends each year on the Friday closest to September 30. Fiscal 2013 consists of
52
weeks and ends on
September 27, 2013
. Fiscal 2012 consisted of
52
weeks and ended on
September 28, 2012
. The
first
quarters of fiscal 2013 and fiscal 2012 each consisted of
13
weeks and ended on
December 28, 2012
and
December 30, 2011
, respectively.
2. MARKETABLE SECURITIES
The Company accounts for its investment in marketable securities in accordance with ASC 320-
Investments-Debt and Equity Securities
, and classifies them as “available for sale.” At
December 28, 2012
, these securities included
$3.2 million
of par value auction rate securities ("ARS"), with a carrying value of
$2.3 million
as compared to the September 28, 2012 balances of
$4.0 million
and
$3.1 million
, respectively. The decrease in the balances held at
December 28, 2012
related to the sale of ARS during the period of
$0.8 million
. The ARS balance is scheduled to mature through 2017. The difference between the par and carrying values is categorized as a temporary loss in accumulated other comprehensive loss. The Company receives the scheduled interest payments in accordance with the terms of the securities and evaluates the appropriate accounting treatment in each period presented.
3. FAIR VALUE
Fair value is the price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides a hierarchy for inputs used in measuring fair value that prioritize the use of observable inputs over the use of unobservable inputs, when such observable inputs are available. The three levels of inputs that may be used to measure fair value are as follows:
|
|
•
|
Level 1 - Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data.
|
|
|
•
|
Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by the Company.
|
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observable inputs may result in a reclassification of assets and liabilities within the three levels of the hierarchy outlined above.
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company measures certain assets and liabilities at fair value on a recurring basis such as our financial instruments, marketable securities and contingent consideration related to business combinations and recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred. There were no transfers between Level 1, 2 or 3 assets or liabilities during the
three months ended
December 28, 2012
.
Due to the illiquid markets for the Company's ARS, the Company believes that these securities are appropriately classified as a Level 3 asset.
The Company has classified its contingent consideration, which relates to an acquisition consummated in fiscal 2011, as a Level 3 liability. The contingent consideration liability was computed based on expected revenue and annual gross margin to be generated by the acquired enterprise using a weighted probability income approach. Revenue and gross margin assumptions used in the calculation required significant management judgment. Accordingly, the contingent consideration liability is classified as a Level 3 liability. The Company reassesses the fair value of the contingent consideration liability on a quarterly basis. There were no adjustments made during the three months ended
December 28, 2012
. The Company may incur up to
$1.0 million
to settle the contingent consideration liability during the third fiscal quarter of fiscal 2013.
As of
December 28, 2012
, assets and liabilities recorded at fair value on a recurring basis consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant
Other
Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
Money market
|
$
|
186,289
|
|
|
$
|
186,289
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Auction rate securities
|
2,288
|
|
|
—
|
|
|
—
|
|
|
2,288
|
|
Total
|
$
|
188,577
|
|
|
$
|
186,289
|
|
|
$
|
—
|
|
|
$
|
2,288
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration liability recorded for business combinations
|
$
|
1,046
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,046
|
|
The following table summarizes changes to the fair value of the ARS, which is a Level 3 asset (in thousands):
|
|
|
|
|
|
|
|
Auction Rate Securities
|
Balance at September 28, 2012
|
|
$
|
3,093
|
|
Sale of auction rate securities
|
|
(805
|
)
|
Balance at December 28, 2012
|
|
$
|
2,288
|
|
There were no changes to the fair value of the contingent consideration which is recorded as a Level 3 liability during the three months ended December 28, 2012.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company's non-financial assets and liabilities, such as goodwill, intangible assets, and other long lived assets resulting from business combinations are measured at fair value using income approach valuation methodologies at the date of acquisition and subsequently re-measured if there are indicators of impairment. There were no indicators of impairment identified during the
three months ended
December 28, 2012
.
4. INVENTORY
Inventory consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
December 28,
2012
|
|
September 28,
2012
|
Raw materials
|
$
|
23,300
|
|
|
$
|
27,170
|
|
Work-in-process
|
110,615
|
|
|
111,190
|
|
Finished goods
|
84,218
|
|
|
83,037
|
|
Finished goods held on consignment by customers
|
11,401
|
|
|
11,523
|
|
Total inventory
|
$
|
229,534
|
|
|
$
|
232,920
|
|
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
December 28,
2012
|
|
September 28,
2012
|
Land and improvements
|
$
|
12,011
|
|
|
$
|
12,009
|
|
Buildings and improvements
|
57,859
|
|
|
56,969
|
|
Furniture and fixtures
|
25,529
|
|
|
25,380
|
|
Machinery and equipment
|
641,147
|
|
|
623,328
|
|
Construction in progress
|
38,246
|
|
|
36,902
|
|
Total property, plant and equipment, gross
|
774,792
|
|
|
754,588
|
|
Accumulated depreciation
|
(487,539
|
)
|
|
(475,205
|
)
|
Total property, plant and equipment, net
|
$
|
287,253
|
|
|
$
|
279,383
|
|
6. GOODWILL AND INTANGIBLE ASSETS
There were no changes to the carrying amount of goodwill during the three months ended December 28, 2012.
The Company tests its goodwill and non-amortizing trademarks for impairment annually as of the first day of its fourth fiscal quarter and in interim periods if certain events occur indicating the carrying value of goodwill or non-amortizing trademarks may be impaired. There were no indicators of impairment noted during the three months ended
December 28, 2012
.
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
Weighted
Average
Amortization
Period Remaining (Years)
|
December 28, 2012
|
|
September 28, 2012
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer relationships
|
3.3
|
$
|
78,710
|
|
|
$
|
(39,500
|
)
|
|
$
|
39,210
|
|
|
$
|
78,710
|
|
|
$
|
(36,242
|
)
|
|
$
|
42,468
|
|
Developed technology and other
|
3.5
|
89,366
|
|
|
(46,220
|
)
|
|
43,146
|
|
|
89,366
|
|
|
(42,266
|
)
|
|
47,100
|
|
In-process research and development
|
1.1
|
6,050
|
|
|
(4,121
|
)
|
|
1,929
|
|
|
6,050
|
|
|
(3,177
|
)
|
|
2,873
|
|
Trademarks
|
Indefinite
|
1,569
|
|
|
—
|
|
|
1,569
|
|
|
1,569
|
|
|
—
|
|
|
1,569
|
|
Total intangible assets
|
|
$
|
175,695
|
|
|
$
|
(89,841
|
)
|
|
$
|
85,854
|
|
|
$
|
175,695
|
|
|
$
|
(81,685
|
)
|
|
$
|
94,010
|
|
Annual amortization expense for the next five years related to intangible assets is expected to be as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining 2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
Thereafter
|
Amortization expense
|
$
|
21,045
|
|
|
$
|
23,980
|
|
|
$
|
21,041
|
|
|
$
|
16,247
|
|
|
$
|
1,972
|
|
|
$
|
—
|
|
7. INCOME TAXES
Income tax provision consisted of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
December 28,
2012
|
|
December 30,
2011
|
United States income taxes
|
$
|
17,832
|
|
|
$
|
15,492
|
|
Foreign income taxes
|
2,517
|
|
|
2,044
|
|
Provision for income taxes
|
$
|
20,349
|
|
|
$
|
17,536
|
|
For the
three months ended
December 28, 2012
, the difference between the Company's effective tax rate of
23.4%
and the
35%
United States federal statutory rate resulted primarily from foreign earnings taxed at rates lower than the federal statutory rate and the domestic production activities deduction, partially offset by an increase in the Company's tax expense related to a change in the Company's reserve for uncertain tax positions. For the
three months ended
December 30, 2011
, the difference between the Company's effective tax rate of
23.5%
and the
35%
United States federal statutory rate resulted primarily from foreign earnings taxed at rates lower than the federal statutory rate, the recognition of research and development tax credits earned and the domestic production activities deduction, partially offset by an increase in the Company's tax expense related to a change in the Company's reserve for uncertain tax positions.
On October 2, 2010, the Company expanded its presence in Asia by launching operations in Singapore. The Company operates under a tax holiday in Singapore, which is effective through September 30, 2020. The tax holiday is conditional upon the Company's compliance with certain employment and investment thresholds in Singapore. The Company continues to be in compliance with such conditions as of the date that this quarterly report on Form 10-Q was filed.
In accordance with ASC 740
Income Taxes
("ASC 740"), management has determined that it is more likely than not that a portion of the Company's prior and current year income tax benefits will not be realized. Accordingly, as of
December 28, 2012
, the Company has maintained a valuation allowance of
$46.8 million
. This valuation allowance is comprised of
$33.6 million
related to United States state research tax credits and
$13.2 million
related to the Company's foreign deferred tax assets.
Realization of benefits from the Company's deferred tax assets, net of valuation allowance, is dependent upon generating United States source taxable income in the future. The Company will continue to evaluate its valuation allowance in future periods and depending upon the outcome of that assessment, additional amounts could be reversed or recorded and recognized as an adjustment to income tax benefit or expense. Such adjustments could cause the Company's effective income tax rate to vary in future periods. The Company will need to generate
$208.7 million
of United States federal taxable income in future years to utilize all of the Company's net operating loss carryforwards, research and experimentation tax credit carryforwards, and deferred income tax temporary differences, net of valuation allowance, as of
December 28, 2012
.
During the
three months ended
December 28, 2012
, the Company increased its gross unrecognized tax benefits by
$3.6 million
to
$55.9 million
. Of the total unrecognized tax benefits at
December 28, 2012
,
$42.6 million
would impact the effective tax rate, if recognized. The remaining unrecognized tax benefits would not impact the effective tax rate, if recognized, due to the Company's valuation allowance and certain positions which were required to be deferred. There are no significant positions that the Company anticipates could change within the next twelve months. The Company accrued
$0.3 million
of interest related to unrecognized tax benefits during the three months ended
December 28, 2012
. The Company's policy is to recognize accrued interest and penalties, if incurred, on any unrecognized tax benefits as a component of income tax expense.
The federal tax credit available under the Internal Revenue Code for research and development expenses lapsed on December 31, 2011. As of December 28, 2012, the United States Congress had not taken action to extend the research and development tax credit. Accordingly, the income tax provision for the three months ended December 28, 2012 does not include the impact of such research and development tax credits earned after December 31, 2011.
8. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, various lawsuits, claims and proceedings have been, and may in the future be, instituted or asserted against the Company, including those pertaining to patent infringement, intellectual property, environmental, product liability and warranty, safety and health, employment and contractual matters.
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 the Company's business and have demanded and may in the future demand that the Company license their technology. The outcome of any such litigation cannot be predicted with certainty and some such lawsuits, claims or proceedings may be disposed of unfavorably to the Company. Generally speaking, intellectual property disputes often have a risk of injunctive relief, which, if imposed against the Company, could materially and adversely affect the Company's financial condition, or results of operations. From time to time the Company may also be involved in legal proceedings in the ordinary course of business. Legal costs are expensed as incurred.
On June 6 and 7, 2011, two putative stockholder class action lawsuits (Case No. 111CV202403 (the “Bushansky action”) and Case No. 111CV202501 (the “Venette action”), respectively) were filed in California Superior Court in Santa Clara County naming Advanced Analogic Technologies Inc. ("AATI"), members of AATI's board of directors, the Company and PowerCo Acquisition Corp. (“Merger Sub”) as defendants. The lawsuits related to conduct surrounding the Company's acquisition of AATI. On July 26, 2011, the Court issued an order consolidating the Bushansky action and Venette action into a single, consolidated action captioned In re Advanced Analogic Technologies Inc. Shareholder Litigation, Lead Case No. 111CV202403, and designating an amended complaint filed on July 14, 2011 in the Venette action as the operative complaint in the litigation.
On November 30, 2011, following confidential arbitration proceedings in the Delaware Court of Chancery, the Company announced that it and AATI had amended their previously announced merger agreement whereby the Company would acquire AATI at a reduced price through a tender offer. The Company and AATI completed the transaction on January 9, 2012. On March 2, 2012, the Court stayed all discovery in the matter and ordered that Plaintiffs file an amended complaint by April 20, 2012.
On April 20, 2012, Plaintiffs filed an amended complaint (“First Amended Complaint”) against each of the original defendants with the exception of Merger Sub. The First Amended Complaint alleges, among other things, that (1) members of AATI's board of directors breached their fiduciary duties by (a) failing to take steps to maximize the value of AATI to its public shareholders by failing to adequately consider potential acquirers, (b) agreeing to the merger for inadequate consideration on unfair terms; (c) causing the filing of a materially misleading Schedule 14D-9 that failed to (i) disclose a basis for the price reduction, (ii) describe the arbitration proceedings, and (iii) include any financial valuation or fairness opinion concerning whether the revised merger consideration was fair; and (d) causing the issuance of amendments to the Schedule 14D-9 that failed to respond adequately to the SEC's disclosure directives; and (2) Skyworks and AATI allegedly aided and abetted these purported breaches of fiduciary duties. On June 22, 2012, the defendants filed demurrers to the First Amended Complaint. The Court will hold a hearing on those demurrers on February 15, 2013.
The Company monitors the status of these and other contingencies on an ongoing basis to ensure amounts are recognized and/or disclosed in our financial statements and footnotes as required by ASC 450, Loss Contingencies. At the time of this filing, the Company had not recorded any accrual for loss contingencies associated with its legal proceedings as losses resulting from such matters were determined to be remote. In addition, the Company does not believe there are any legal proceedings that are reasonably possible to result in a material loss. We are engaged in various other legal actions, not described above, in the normal
course of business and, while there can be no assurances, the Company believes the outcome of all pending litigation involving the Company will not have, individually or in the aggregate, a material adverse effect on our business.
Guarantees and Indemnifications
The Company has made no contractual guarantees for the benefit of third parties. However, the Company generally indemnifies its customers from third-party intellectual property infringement litigation claims related to its products, and, on occasion, also provides other indemnities related to product sales. In connection with certain facility leases, the Company has indemnified its lessors for certain claims arising from the Company's activities at the facility or out of the lease.
The Company indemnifies its directors and officers to the maximum extent permitted under the laws of the state of Delaware. The duration of the indemnities varies, and in many cases is indefinite. The indemnities to customers in connection with product sales generally are subject to limits based upon the amount of the related product sales and in many cases are subject to geographic and other restrictions. In certain instances, the Company's indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. As of
December 28, 2012
, the Company had not recorded any liability for these indemnities in the accompanying consolidated balance sheets. The Company continues to monitor and reassess indemnities each reporting period.
9. COMMON STOCK REPURCHASE
On November 8, 2012, the Board of Directors approved a stock repurchase program, pursuant to which the Company is authorized to repurchase up to
$200.0 million
of the Company's common stock from time to time on the open market or in privately negotiated transactions, as permitted by securities laws and other legal requirements. During the
three months ended
December 28, 2012
, the Company paid approximately
$41.7 million
(including commissions) in connection with the repurchase of
1.9 million
shares of its common stock (paying an average price of
$21.93
per share). As of
December 28, 2012
,
$158.3 million
remained available under the existing share repurchase authorization.
10. EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
Three Months Ended
|
|
December 28,
2012
|
|
December 30,
2011
|
Net income
|
$
|
66,493
|
|
|
$
|
57,126
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
189,377
|
|
|
183,956
|
|
Dilutive effect of equity based awards
|
4,624
|
|
|
4,476
|
|
Dilutive effect of convertible debt
|
—
|
|
|
1,250
|
|
Weighted average shares outstanding – diluted
|
194,001
|
|
|
189,682
|
|
|
|
|
|
Net income per share – basic
|
$
|
0.35
|
|
|
$
|
0.31
|
|
Net income per share - diluted
|
$
|
0.34
|
|
|
$
|
0.30
|
|
Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share includes the dilutive effect of equity based awards and the convertible debt using the treasury stock method.
Equity based awards exercisable for approximately
6.2 million
shares and
5.6 million
shares were outstanding but not included in the computation of earnings per share for the
three months ended
December 28, 2012
and
December 30, 2011
, respectively, as their effect would have been anti-dilutive.
11. RESTRUCTURING AND OTHER CHARGES
During the three months ended
December 28, 2012
, the Company incurred approximately
$1.6 million
in employee severance costs primarily related to the front-end solutions restructuring plan that was implemented during the period.
During the three months ended December 30, 2011, the Company recorded a
$0.7 million
restructuring charge related to a plan to reduce redundancies associated with the acquisition of SiGe Semiconductor, Inc. during fiscal 2011.
Activity and liability balances related to the Company's restructuring actions are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Closings
|
|
License and
Software Write-offs and Other
|
|
Workforce
Reductions
|
|
Total
|
Balance at September 28, 2012
|
$
|
1,144
|
|
|
$
|
135
|
|
|
$
|
449
|
|
|
$
|
1,728
|
|
Charged to costs and expenses
|
—
|
|
|
—
|
|
|
1,644
|
|
|
1,644
|
|
Cash payments
|
(48
|
)
|
|
(77
|
)
|
|
(945
|
)
|
|
(1,070
|
)
|
Other
|
(553
|
)
|
|
—
|
|
|
553
|
|
|
—
|
|
Balance at December 28, 2012
|
$
|
543
|
|
|
$
|
58
|
|
|
$
|
1,701
|
|
|
$
|
2,302
|
|
The Company made cash payments related to restructuring activities of approximately
$1.1 million
during the
three months ended
December 28, 2012
and expects all cash payments to be completed in fiscal 2013 in all material respects.