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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2002
Commission file number 1-5560
SKYWORKS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2302115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 SYLVAN ROAD, WOBURN, MASSACHUSETTS 01801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 935-5150
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ _ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JULY 26,2002
- -------------------------------------- ---------------------------
COMMON STOCK, PAR VALUE $.25 PER SHARE 137,510,275
Skyworks Solutions, Inc. and Subsidiaries
TABLE OF CONTENTS
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PAGE
PART 1 FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets - June 30, 2002 (Unaudited) and
September 30, 2001............................................... 3
Consolidated Statements of Operations - Three and Nine Months
EndedJune 30, 2002 and June 30, 2001 (Unaudited)................. 4
Consolidated Statements of Cash Flows - Nine Months Ended
June 30, 2002 and June 30, 2001 (Unaudited)...................... 5
Notes to Interim Consolidated Financial Statements.................. 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk..... 36
PART 2 OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders............ 37
Item 6 - Exhibits and Reports on Form 8-K............................... 37
- --------------------------------------------------------------------------------
2
Skyworks Solutions, Inc. and Subsidiaries
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share amounts)
JUNE 30, SEPTEMBER 30,
2002 2001
----------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 55,276 $ 1,998
Short-term investments ......................................... 35,422 --
Receivables, net of allowance for doubtful accounts of
$0 and $3,206 ................................................ 24,344 40,754
Inventories .................................................... 59,503 37,383
Other current assets ........................................... 10,332 3,225
----------- ---------
Total current assets ...................................... 184,877 83,360
Property, plant and equipment, less accumulated depreciation and
amortization of $307,134 and $284,879 ......................... 148,328 169,547
Goodwill and intangible assets, less accumulated amortization
of $31 and $20,594 ............................................. 940,572 57,606
Deferred income taxes ............................................ 23,737 --
Other assets ..................................................... 8,477 3,774
----------- ---------
Total assets .............................................. $ 1,305,991 $ 314,287
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ........................... $ 129 $ --
Short-term note payable to Conexant............................. 150,000 --
Accounts payable ............................................... 16,573 2,653
Accrued compensation and benefits .............................. 14,476 12,363
Other current liabilities ...................................... 105,305 7,804
----------- ---------
Total current liabilities ................................. 286,483 22,820
Long-term debt, less current maturities .......................... 73
Long-term liabilities ............................................ 4,472 3,806
----------- ---------
Total liabilities ...................................... 291,028 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;
137,368 shares issued and outstanding .......................... 34,342 --
Additional paid-in capital ....................................... 1,149,466 --
Retained earnings (accumulated deficit) .......................... (168,710) --
Deferred compensation, net of accumulated amortization of $2 ..... (135) --
Conexant's net investment ........................................ -- 287,661
----------- ---------
Total stockholders' equity ................................ 1,014,963 287,661
----------- ---------
Total liabilities and stockholders' equity ................ $ 1,305,991 $ 314,287
=========== =========
See accompanying notes to these consolidated financial statements.
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Skyworks Solutions, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net revenues:
Third parties ............................... $ 102,435 $ 42,310 $ 283,124 $ 157,411
Conexant .................................... 10,545 8,735 23,972 36,633
--------- --------- --------- ---------
Total net revenues ..................... 112,980 51,045 307,096 194,044
--------- --------- --------- ---------
Cost of goods sold:
Third parties ............................... 85,737 55,137 221,712 224,986
Conexant .................................... 7,180 8,322 19,934 34,918
--------- --------- --------- ---------
Total cost of goods sold ............... 92,917 63,459 241,646 259,904
--------- --------- --------- ---------
Gross margin .................................. 20,063 (12,414) 65,450 (65,860)
Operating expenses:
Research and development .................... 31,653 26,571 95,454 82,954
Selling, general and administrative ......... 10,380 12,681 32,103 46,769
Amortization of intangible assets ........... 3,579 3,808 11,802 11,352
Purchased in-process research and development 65,500 -- 65,500 --
Special charges ............................. 114,837 86,627 114,902 88,473
--------- --------- --------- ---------
Total operating expenses ............... 225,949 129,687 319,761 229,548
--------- --------- --------- ---------
Operating (loss) .............................. (205,886) (142,101) (254,311) (295,408)
Other (loss) income, net ...................... (117) 23 (58) 75
--------- --------- --------- ---------
(Loss) before income taxes .................... (206,003) (142,078) (254,369) (295,333)
(Credit) provision for income taxes ........... (24,058) 347 (19,788) 1,216
--------- --------- --------- ---------
Net (loss) .................................... $(181,945) $(142,425) $(234,581) $(296,549)
========= ========= ========= =========
(Loss) per share, basic and diluted ........... $ (1.92) $ (1.64 $ (2.51) $ (3.49)
========= ========= ========= =========
Number of shares used in per share computation 94,519 86,619 93,545 84,990
========= ========= ========= =========
See accompanying notes to these consolidated financial statements.
4
Skyworks Solutions, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
NINE MONTHS ENDED
JUNE 30,
-------------------------
2002 2001
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $ (234,581) $(296,549)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ......................................... 35,154 46,864
Amortization of intangible assets .................... 11,802 11,352
Amortization of deferred compensation ................ 2 --
Deferred income taxes ................................ (23,737) --
Provision for (recoveries of) losses on accounts
Receivable ........................................ (1,178) 5,782
In-process research and development charge ........... 65,500 --
Inventory provisions ................................. 2,704 58,710
Asset impairments .................................... 111,817 86,209
Loss on sale of assets ............................... 209 40
Changes in assets and liabilities net of acquisition:
Receivables .......................................... (14,843) 29,594
Inventories .......................................... (8,273) (1,929)
Accounts payable ..................................... 7,858 (2,233)
Accrued expenses and other current liabilities ....... 14,297 (1,768)
Other ................................................ (6,463) (1,833)
----------- ---------
Net cash used in operating activities ............. (39,732) (65,761)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ....................................... (21,426) (50,712)
Cash of acquiree ........................................... 102,524 --
Dividend to Conexant ....................................... (3,070) --
----------- ---------
Net cash provided by (used in) investing activities 78,028 (50,712)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transfers from Conexant ................................ 50,404 116,379
----------- ---------
Net increase (decrease) in cash and cash equivalents ....... 88,700 (94)
Cash and cash equivalents at beginning of period ........... 1,998 4,179
----------- ---------
Cash and cash equivalents at end of period ................. $ 90,698 $ 4,085
=========== =========
Supplemental disclosure of non-cash investing and
financing activities:
Acquisition of Alpha Industries, Inc. ...................... $ 1,183,105 $ --
=========== =========
Dividend to Conexant ....................................... $ 201,646 $ --
=========== =========
See accompanying notes to these consolidated financial statements.
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Skyworks Solutions, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
On December 16, 2001, Alpha Industries, Inc. (Alpha), Conexant Systems, Inc.
(Conexant) and Washington Sub, Inc. (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 a
merger of this wireless business into Alpha with Alpha as the surviving entity
in the merger. This merger was completed on June 25, 2002. Following the merger,
Alpha changed its corporate name to Skyworks Solutions, Inc (the Company).
Immediately following completion of the merger, the Company purchased Conexant's
semiconductor assembly, module manufacturing and test facility located in
Mexicali, Mexico, 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. 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 consolidated financial
statements, the Washington business and the Mexicali operations are collectively
referred to as Washington/Mexicali.
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.
The Company is a leading wireless semiconductor company focused on providing
front-end modules, radio frequency (RF) subsystems 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. The Company's products are used in dozens of industry-leading handset
designs.
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). 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, have been
condensed or omitted pursuant to those rules and regulations. However, in the
opinion of management, the financial information reflects all adjustments,
consisting of adjustments of a normal recurring nature, as well as purchase
accounting, restructuring, impairments, and other special charges, necessary to
present fairly the financial position, results of operations, and cash flows of
the Company. This information should be read in conjunction with the financial
statements and notes thereto of Washington/Mexicali contained in the
registration statement on Form S-4 filed by the Company with the Securities and
Exchange Commission on May 10, 2002 and Form S-3 filed on July 15, 2002.
6
Skyworks Solutions, Inc. and Subsidiaries
The consolidated financial statements have been prepared using Conexant's
historical bases 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 during the periods presents.
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
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's net investment. As a
result, none of Conexant'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'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 of Washington/Mexicali did
not include an allocation of Conexant'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 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.
After the spin-off and the merger, the Company is performing these functions
using its own resources or purchased services, including services obtained from
Conexant pursuant to a transition services agreement that expires on December
31, 2002 unless extended by mutual agreement.
FISCAL PERIODS -- The Company's fiscal year ends on the Friday closest to
September 30. For presentation purposes, references made to the periods ended
June 30, 2002 and 2001 relate to the actual fiscal 2002 third quarter ended June
28, 2002 and the actual fiscal 2001 third quarter ended June 29, 2001,
respectively.
2. SHORT-TERM INVESTMENTS
The Company's short-term investments are classified as held-to-maturity. These
investments consist primarily of commercial paper and securities issued by
various federal agencies and corporations with original maturities of more than
90 days and less than one year. 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.
7
Skyworks Solutions, Inc. and Subsidiaries
3. INVENTORIES
Inventories consist of the following (in thousands):
JUNE 30, SEPTEMBER 30,
2002 2001
-------- ------------
Raw materials ..... $13,043 $ 3,626
Work-in-process ... 40,204 19,164
Finished goods .... 6,256 14,593
------- -------
$59,503 $37,383
======= =======
4. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following at June 30, 2002
(thousands):
Restructuring charges and exit costs....... $ 9,718
Accrued purchase obligations............... 55,774
Accrued take or pay obligations............ 13,333
Product warranty accrual................... 12,970
Other...................................... 13,510
--------
Total other current liabilities............ $105,305
========
5. DEBT
DEBT CONSISTED OF THE FOLLOWING (IN THOUSANDS):
JUNE 30, SEPTEMBER 30,
2002 2001
-------- ------------
Note to Conexant - Current .. $150,000 $ --
CDBG Grant - Current ........ 129 --
CDBG Grant - Long-term ...... 73 --
-------- ---------
Total ............. $150,202 $ --
======== =========
The $150 million short-term promissory notes delivered by the Company to
Conexant, are secured by the assets of the Company. Unless paid earlier at the
option of the Company or pursuant to mandatory prepayment provisions in the
financing agreement, fifty percent of the principal portion of the short-term
promissory notes is due on March 24, 2003, and the remaining fifty percent of
the notes is due on June 24, 2003. Interest on the notes is 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.
The Company obtained 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% of the
unamortized balance.
In addition, the Company has available a short-term $100 million revolving loan
facility from Conexant 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 revolving facility will be
available if the Company has more than $150 million of eligible domestic
receivables. The entire principal of any revolving amounts borrowed is due on
June 24, 2003. There have been no borrowings to date under this revolving
facility.
8
Skyworks Solutions, Inc. and Subsidiaries
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three and nine months ended June 30, 2002
and 2001 is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2002 2001 2002 2001
----------- ---------- ---------- -----------
Net loss...................................... $ (181,945) $ (142,425) $ (234,581) $ (296,549)
Other comprehensive loss:
Foreign currency translation adjustments.... 409 (9) 307 (236)
---------- ---------- ---------- ----------
Comprehensive loss....................... $ (181,536) $ (142,434) $ (234,274) $ (296,785)
========== ========== ========== ==========
Accumulated other comprehensive loss, comprised of foreign currency translation
adjustments was retained by Conexant at June 25, 2002.
7. SPECIAL CHARGES
ASSET IMPAIRMENTS
During the third quarter of fiscal 2002, the Company recorded a $66.0 million
charge for the impairment of the assembly and test machinery and equipment and
related facility. The Company recorded a tax benefit of approximately $23
million in connection with the charge. 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 and the related impact on
the current and projected outlook.
The Company has experienced a severe decline in factory utilization at Mexicali
for non-wireless products and projected decreasing revenues and new order
volume. Management believes these factors indicated that the carrying value of
the assembly and test machinery and equipment and related facility may be
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, 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 are 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. The Company 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 Company recorded a $45.8 million
charge for the write-off of goodwill and other intangible assets associated with
our fiscal 2000 acquisition of the Philsar Bluetooth business. Management has
determined that the Company will not support the technology associated with the
Philsar Bluetooth business. Accordingly, this product line will be discontinued
and the employees associated with the product line have 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 been 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 dramatic downturn in the market for wireless
communications products and the related impact on the then-current and projected
business outlook of the Company. Through the third quarter of fiscal 2001, the
Company 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-
9
Skyworks Solutions, Inc. and Subsidiaries
current levels, indicated that the value of the Newbury Park facility may be
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's view of the outlook for the industry,
partially offset by declining average selling prices. The declines in average
selling prices are consistent with historical trends and management'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 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.
RESTRUCTURING CHARGES
During the first nine months of fiscal 2002, the Company reduced its workforce
by approximately 140 employees through involuntary severance programs and
recorded restructuring charges of approximately $3 million for costs related to
the workforce reduction and the consolidation of certain 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 the first nine months of fiscal 2001, the Company reduced its workforce
by approximately 110 employees, including approximately 100 employees in
manufacturing operations. Restructuring charges of $1.8 million were recorded
for such actions and were based upon estimates of the cost of severance benefits
for the affected employees. Substantially all amounts accrued for these actions
are expected to be paid within one year.
The following table summarizes the activity in the restructuring accrual
included as a component of accrued expenses from September 30, 2001 through June
30, 2002 (in thousands):
Fiscal 2002 Fiscal 2002
Fiscal 2001 workforce facility closings
actions reductions and other Total
----------- ----------- ----------------- -------
Restructuring balance, September 30, 2001 $ 724 $ -- $ -- $ 724
Charged to costs and expenses ........... 65 2,923 97 3,085
Cash payments ........................... (505) (1,403) -- (1,908)
------- ------- ------ -------
Restructuring balance, June 30, 2002 .... $ 284 $ 1,520 $ 97 $(1,901)
======= ======= ====== =======
8. SEGMENT INFORMATION AND CUSTOMER CONCENTRATION
The Company is organized into one reportable segment.
SIGNIFICANT CUSTOMERS
During the three months ended June 30, 2002, two customers accounted for
approximately 37% and 10% of the Company's net revenues from third parties,
respectively. During the three months ended June 30, 2001, three customers
accounted for approximately 48%, 14% and 10%, respectively, of the Company's net
revenues from third parties. For the nine months ended June 30, 2002, one
customer accounted for approximately 45% of the Company's net revenues from
third parties. For the nine months ended June 30, 2001, three customers
accounted for approximately 41%, 20% and 11%, respectively, of the Company's net
revenues from third parties. As of June 30, 2002 and September 30, 2001, two
customers accounted for approximately 25% and 12% and two customers accounted
for approximately 63% and 13%, respectively, of the Company's gross accounts
receivable. Revenues
10
Skyworks Solutions, Inc. and Subsidiaries
derived from customers located in the Americas, Asia-Pacific and Europe/Middle
East/Africa regions were 4%, 91% and 5%, respectively of net revenues from third
parties for the three and nine months ended June 30, 2002.
9. INCOME (LOSS) PER SHARE
Prior to the merger with Alpha Industries, Inc., Conexant's wireless business
had no separate capitalization. Income (loss) per share for the periods prior to
the merger are restated as if Conexant's wireless business had been a stand
alone entity for all periods presented. Income (loss) per share is based on the
weighted average number of shares of common stock outstanding during the period.
Diluted income (loss) per share did not include the effect of stock options and
a warrant outstanding during the period because their effect was antidilutive.
Loss per share for periods prior to the merger with Alpha are based on the
number of equivalent shares received by the shareholders of Conexant's Wireless
Business.
The following table sets forth the computation of basic and diluted loss per
share (in thousands, except per share amounts):
THREE MONTH NINE MONTH
PERIODS ENDED PERIODS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net loss ................................... $(181,945) $(142,425) $(234,581) $(296,549)
Weighted average shares outstanding-basic .. 94,519 86,619 93,545 84,990
Effect of dilutive stock options and warrant -- -- -- --
--------- --------- --------- ---------
Weighted average shares outstanding-diluted 94,519 86,619 93,545 84,990
========= ========= ========= =========
Basic and diluted loss per share ........... ($ 1.92) ($ 1.64) ($ 2.51) ($ 3.49)
========= ========= ========= =========
For the period ended June 30, 2002, options and a warrant to purchase
approximately 32.8 million shares were outstanding but not included in the
computation of diluted (loss) earnings per share because their effect would have
been antidilutive. For the period ended June 30, 2001, options to purchase
approximately 28.7 million shares were outstanding but not included in the
computation of diluted (loss) earnings per share because their effect would have
been antidilutive.
10. COMMITMENTS AND CONTINGENCIES
Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the Company or its subsidiaries, including those pertaining to
acquisitions, product liability, intellectual property, environmental, safety
and health, and employment matters.
The outcome of litigation cannot be predicted with certainty and some lawsuits,
claims or proceedings may be disposed of unfavorably to the Company. Many
intellectual property disputes have a risk of injunctive relief and there can be
no assurance that a license will be granted. Injunctive relief could materially
and adversely affect the financial condition or results of operations of the
Company. Based on its evaluation of matters which are pending or asserted, and
taking into account any reserves for such matters, management believes the
disposition of such matters will not have a material adverse effect on the
financial condition or results of operations of the Company.
Under supply agreements entered into in connection with the merger, the Company
will receive wafer fabrication, wafer probe and certain other services from the
Newport Beach, California foundry joint venture's wafer fabrication facility (a
joint venture of Conexant and The Carlyle Group) and we will provide wafer
fabrication, wafer probe, final test and other services to Conexant at our
Newbury Park facility, in each case, for a three-year period after the merger.
We will also provide semiconductor assembly and test services to Conexant at our
Mexicali facility. The
11
Skyworks Solutions, Inc. and Subsidiaries
price for the services under the agreements in the first year will be the actual
cost of the services. In the second year the price will be the average of (1)
the actual cost in the first year and (2) the market price (determined prior to
the start of the second year) of the services. In the third year the price will
be based on the market price of the services.
During the term of the supply agreements with the Newport Beach, California
foundry joint venture, our unit cost of goods supplied by the Newport Beach
foundry joint venture will continue to be affected by the level of utilization
of the Newport Beach foundry joint venture's wafer fabrication facility and
other factors outside our control. Under these supply agreements, we are
committed to obtain a minimum level of service from the Newport Beach,
California foundry joint venture. We estimate that our obligation under these
agreements will result in excess costs of approximately $13.3 million and we
have recorded this liability and charged to cost of sales in the current period.
In addition, 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.
11. BUSINESS COMBINATIONS
On December 16, 2001, Alpha (the predecessor to the Company), Conexant and
Washington, entered into a definitive agreement providing for the combination of
Conexant's wireless business with the 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 a
merger of this wireless business into Alpha with Alpha as the surviving entity
in the merger. This 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 Conexant's
semiconductor assembly, module manufacturing and test facility located in
Mexicali, Mexico, and certain related operations (the Mexicali operations) for
$150 million. For financial accounting purposes, the sale of the Mexicali
operations by Conexant to the Company 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 is
treated as the acquirer and Alpha as the acquiree primarily because Conexant
shareholders owned a majority of the Company upon completion of the merger.
Under a reverse acquisition, the purchase price of Alpha is 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.
Accordingly, the historical financial statements of Washington/ Mexicali became
the historical financial statements of Skyworks Solutions after the merger.
In connection with the acquisition, 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, reduction in workforce of approximately 210
employees at a cost of $4.8 million and facility exit or closing costs of $3.0
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 Industries common stock.......... $ 1,054,111
Fair value of Alpha Industries stock options ............... 95,388
Estimated transaction costs of acquirer..................... 33,606
-----------
Total.................................................. $ 1,183,105
===========
12
Skyworks Solutions, Inc. and Subsidiaries
The purchase price was allocated as follows:
(IN THOUSANDS)
Working capital................................... $ 120,474
Property, plant and equipment..................... 58,700
Amortized intangible assets....................... 34,082
Unamortized intangible assets..................... 2,300
Goodwill.......................................... 904,221
In-process research and development............... 65,500
Long-term debt.................................... (73)
Other long-term liabilities....................... (2,236)
Deferred compensation............................. 137
-----------
Total........................................ $ 1,183,105
===========
The allocation of the purchase price is preliminary and is subject to revision,
which is not expected to be material, based on the final valuation of the net
assets acquired.
The following unaudited pro forma financial information presents the
consolidated operations of the Company as if the June 25, 2002 acquisition 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
acquisition. 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
acquisition been consummated at the beginnings of the periods presented, nor is
it necessarily indicative of any future operating results.
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net revenue .............................. $ 137,022 $ 83,266 $ 392,418 $ 358,944
Net loss ................................. $(166,925) $(153,678) $(240,227) $(297,053)
Net loss per share (basic and diluted) ... $ (1.22) $ (1.17) $ (1.75) $ (2.30)
========= ========= ========= =========
13
Skyworks Solutions, Inc. and Subsidiaries
12. RECAPITALIZATION
The following table reconciles the changes in Conexant's net investment and
stockholders' equity for the nine months ended June 30, 2002 as a result of the
spin-off of the Wireless Division and Mexicali operations of Conexant and the
subsequent acquisition of Alpha Industries, Inc.
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.
Conexant's Net Common Accumulated Deferred
Investment Stock APIC Deficit Compensation
-------------- ------ --------- ----------- ------------
BALANCE AS OF OCTOBER 1, 2001 $ 287,661 -- -- -- --
Net transfers from Conexant 17,098 -- -- -- --
Dividend (204,716) -- -- -- --
Net loss from October 1, 2001
to June 25, 2002 (65,871) -- -- -- --
Recapitalization as a result
of purchase accounting under
a reverse acquisition (34,172) 34,342 1,149,466) -- (137)
Amortization of deferred
compensation -- -- -- -- 2
Net loss for period from June 26
to June 28, 2002 -- -- -- (168,710) --
--------- ------ --------- -------- ----
BALANCE AS OF JUNE 30, 2002 $ -- 34,342 1,149,466 (168,710) (135)
========= ====== ========= ======== ====
As of June 30, 2002, the Company has authorized 525 million shares of common
stock, par value $0.25 per share and 25 million shares of preferred stock,
without par value. At June 30, 2002, no preferred shares had been issued and
approximately 137.4 million shares of common stock was issued and outstanding.
As of June 30, 2002, 35.5 million shares were authorized for grant under the
Company's long-term incentive equity-based plans. Approximately, 31.8 million
options to purchase the Company's common stock and a warrant to purchase
approximately 1.0 million shares of the Company's common stock were outstanding
at June 30, 2002.
14
Skyworks Solutions, Inc. and Subsidiaries
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Washington business and the Mexicali operations should be read together with
the Combined Financial Statements of the Washington business and the Mexicali
operations and the notes thereto included in the proxy
statement/prospectus-information statement forming a part of the Company's
registration statement on Form S-4, as amended, filed with the Securities and
Exchange Commission on May 10, 2002 and on Form S-3, filed with the Securities
and Exchange Commission on July 15, 2002 and the financial statements and the
notes thereto appearing elsewhere in those documents.
OVERVIEW
Skyworks is a leading wireless semiconductor company focused on providing
front-end modules, radio frequency (RF) subsystems and complete system solutions
to wireless handset and infrastructure customers worldwide. We offer 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. Our products are used in dozens of industry-leading handset designs.
We operate a gallium arsenide semiconductor wafer fabrication facility in
Newbury Park, California to meet a portion of our wafer requirements. We have
historically provided substantially all of Conexant's requirements for gallium
arsenide wafers. Revenues from Conexant for these products totaled $0.4 million
and $1.1 million for the current quarter and nine months of fiscal 2002,
respectively.
We also operate a semiconductor assembly and test facility in Mexicali, Mexico
and related operations. Our Mexicali operations have historically provided a
substantial portion of our requirements and Conexant's requirements for
semiconductor assembly and test services. Revenues from Conexant for
semiconductor assembly and test services totaled $10.5 million and $24.0 million
for the current quarter and nine months of fiscal 2002, respectively.
We have entered into various agreements with Conexant providing 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 us. 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 the Newport Beach, California
foundry joint venture between Conexant and The Carlyle Group to which Conexant
contributed its Newport Beach wafer fabrication facility. Historically, we have
obtained a portion of our silicon-based semiconductors from the Newport Beach
wafer fabrication facility. We currently expect that we will initially be
obligated to obtain substantially the same volume under the supply agreement
with the Newport Beach, California foundry joint venture as we historically
obtained from Conexant.
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' 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.
15
Skyworks Solutions, Inc. and Subsidiaries
BASIS OF PRESENTATION
On December 16, 2001, Alpha Industries, Inc. (the predecessor to Skyworks
Solutions, Inc.), Conexant Systems, Inc. (Conexant) and Washington Sub, Inc.
(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 a merger of this wireless business
into Alpha with Alpha as the surviving entity in the merger. This merger was
completed on June 25, 2002. Following the merger, Alpha changed its corporate
name to Skyworks Solutions, Inc. (the Company).
Immediately following completion of the merger, the Company purchased Conexant's
semiconductor assembly, module manufacturing and test facility located in
Mexicali, Mexico, and certain related operations (the Mexicali operations) for
$150 million. For financial accounting purposes, the sale of the Mexicali
operations by Conexant to the Company 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 is
treated as the acquirer and Alpha as the acquiree primarily because Conexant
shareholders owned a majority of the combined company upon completion of the
merger. Under a reverse acquisition, the purchase price of Alpha is 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.
Accordingly, the historical financial statements of Washington/ Mexicali became
the historical financial statements of Skyworks Solutions after the merger.
Under purchase accounting, the operating results of the acquirer
(Washington/Mexicali) are included for entire 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
financial information included herein does not necessarily reflect the combined
assets, liabilities, operating results and cash flows of the Company in the
future, nor what they would have been had Washington/Mexicali been a separate
stand-alone entity during the periods presented, as Washington/Mexicali was
formerly a part of Conexant.
The financial statements included in this document have been prepared using
Conexant's historical bases in the assets and liabilities and the historical
operating results of Washington/Mexicali during each respective period. The
financial statements include allocations of certain Conexant operating expenses
for research and development and corporate functions. 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. The allocation methods include
specific identification, activity-based analyses, relative revenues or costs,
manufacturing capacity utilization and headcount.
The financial information included herein does not necessarily reflect 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 during the periods presented.
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
16
Skyworks Solutions, Inc. and Subsidiaries
operations may be affected. We believe the following critical accounting
policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements.
Inventories -- We write down our inventory for estimated obsolescence or
unmarketable inventory in an amount equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required. Once established, these write downs are considered permanent
adjustments to the cost basis of the excess inventory.
Impairment of long-lived assets -- Long-lived assets, including fixed assets,
goodwill and intangible assets, are continually monitored and are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable. The determination of
recoverability is based on an estimate of undiscounted cash flows expected to
result from the use of an asset and its eventual disposition. The estimate of
cash flows is based upon, among other things, certain assumptions about expected
future operating performance. Our estimates of undiscounted cash flows may
differ from actual cash flows due to, among other things, technological changes,
economic conditions, changes to our business model or changes in its 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.
Deferred income taxes -- We have provided a valuation reserve 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
allowances, resulting in income tax benefits in our statement of operations.
Reduction of a portion of the valuation allowance may be applied to reduce the
carrying value of goodwill. We evaluate the realizability of the deferred tax
assets and assess the need for a valuation allowance quarterly.
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 product. 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
RECENT DEVELOPMENTS
During fiscal 2001, we -- like many of our customers and competitors -- were
adversely impacted by a broad slowdown affecting the wireless communications
sector, including most 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 sold for fiscal 2001 was
adversely affected by the significant underutilization of manufacturing
capacity. Cost of goods sold for fiscal 2001 also reflects $58.7 million of
inventory write-downs across our product portfolio resulting from the sharply
reduced end-customer demand for digital cellular handsets.
In the first nine months of fiscal 2002, our revenues from product sales to
third parties increased approximately 80% from the first nine months of fiscal
2001, as a result of renewed demand for our wireless product portfolio. The
increased demand is partially due to reduction in the level of excess channel
inventories that had adversely affected the digital cellular handset markets
during fiscal 2001. Cost of goods sold for the third quarter of fiscal 2002 was
17
Skyworks Solutions, Inc. and Subsidiaries
adversely affected by a charge of $13.3 million in connection with expected
losses for commitments made under take or pay agreements with an affiliate.
EXPENSE REDUCTION AND RESTRUCTURING INITIATIVES
During the first nine months of fiscal 2002, the Company reduced its workforce
by approximately 140 employees through involuntary severance programs and
recorded restructuring charges of approximately $3 million for costs related to
the workforce reduction and the consolidation of certain 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.
In fiscal 2001, we implemented a number of expense reduction and restructuring
initiatives to more closely align our cost structure with the then-current
business environment. The cost reduction initiatives included workforce
reductions, temporary shutdowns of manufacturing facilities and significant
reductions in capital spending.
Through involuntary severance programs and attrition, we reduced our workforce
in fiscal 2001 by approximately 800 employees (principally in our manufacturing
operations), a 22% reduction from January 2001 levels. In addition, we
periodically idled our Newbury Park, California wafer fabrication facility and,
for a portion of fiscal 2001, implemented a reduced workweek at our Mexicali
facility.
We recorded restructuring charges of $2.7 million in fiscal 2001 related to the
workforce reductions completed through September 30, 2001. The restructuring
initiatives and other expense reduction actions resulted in a quarterly
reduction of operating expenses of approximately $4.8 million for the fourth
quarter of fiscal 2001 as compared with the second quarter of fiscal 2001.
ASSET IMPAIRMENTS
During the third quarter of 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. The Company recorded a tax benefit of
approximately $23 million in connection with the charge. 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 current and projected
outlook.
The Company has experienced a severe decline in factory utilization at Mexicali
for non-wireless products and projected decreasing revenues and new order
volume. Management believes these factors indicated that the carrying value of
the assembly and test machinery and equipment and related facility may be
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, 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 are 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. The Company 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 Company recorded a $45.8 million
charge for the write-off of goodwill and other intangible assets associated with
our fiscal 2000 acquisition of the Philsar Bluetooth business. Management has
determined that the Company will not support the technology associated with the
Philsar Bluetooth business. Accordingly, this product line will be discontinued
and the employees associated with the product line have 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 been impaired.
18
Skyworks Solutions, Inc. and Subsidiaries
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 dramatic downturn in the market for wireless
communications products and the related impact on the then-current and projected
business outlook of the Company. Through the third quarter of fiscal 2001, the
Company 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 be 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's view of the outlook for the industry, partially offset by
declining average selling prices. The declines in average selling prices are
consistent with historical trends and management'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 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.
THREE AND NINE MONTHS ENDED JUNE 30, 2002 AND 2001
The following table sets forth the results of our operations expressed as a
percentage of net revenues for the three and nine months ended June 30, 2002 and
2001:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2002 2001 2002 2001
------ ------ ----- ------
Net revenues........................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................... 82.2 124.3 78.7 133.9
------ ------ ----- ------
Gross margin........................... 17.8 (24.3) 21.3 (33.9)
Operating expenses:
Research and development............. 28.0 52.1 31.1 42.8
Selling, general and administrative.. 9.2 24.8 10.5 24.1
Amortization of intangible assets.... 3.2 7.5 3.8 5.9
In-process research and development.. 58.0 -- 21.3 --
Special charges...................... 101.2 169.7 37.4 45.6
------ ------ ----- ------
Total operating expenses.......... 200.0 254.1 104.1 118.3
------ ------ ----- ------
Operating income (loss)................ (182.2) (278.4) (82.8) (152.2)
Other income (expense), net............ (0.1) -- -- --
------ ------ ----- ------
Loss before income taxes............... (182.3) (278.3) (82.8) (152.2)
Provision (credit) for income taxes.... (21.3) 0.7 (6.4) 0.6
------ ------ ----- ------
Net income (loss)...................... (161.0)% (279.0)% (76.4)% (152.8)%
====== ====== ===== ======
19
Skyworks Solutions, Inc. and Subsidiaries
NET REVENUES
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
-------------------------------- ----------------------------------
2002 CHANGE 2001 2002 CHANGE 2001
-------- ------ -------- -------- ------ --------
(in thousands)
Net revenues:
Third parties .. $102,435 142.1% $ 42,310 $283,124 79.9% $157,411
Conexant ....... 10,545 20.7% 8,735 23,972 (34.6)% 36,633
-------- ----- -------- -------- ----- --------
$112,980 121.3% $ 51,045 $307,096 58.3% $194,044
======== ===== ======== ======== ===== ========
We market and sell our semiconductor products and system solutions to leading
OEMs of communication electronics products, third-party original design
manufacturers, or ODMs, and contract manufacturers and indirectly through
electronic components distributors. Samsung Electronics Co. Ltd accounted for
37% and 45% of net revenues from third parties for the three and nine months
ended June 30, 2002 and sales to the Company's top 10 customers accounted for
86% and 90%, respectively, of net revenues from third parties for the three and
nine months ended June 30, 2002, respectively. Revenues derived from customers
located in the Americas, Asia-Pacific and Europe/Middle East/Africa regions were
4%, 91% and 5%, respectively, of net revenues from third parties for the three
and nine months ended June 30, 2002.
We generally recognize revenues from product sales directly to our customers and
to distributors upon shipment and transfer of title. Provision for sales returns
is made at the time of sale based on experience. An insignificant portion of
product sales are made to electronic component distributors under agreements
allowing for price protection and/or a right of return on unsold products. The
recognition of revenue on sales to these distributors is deferred until the
distributors sell the products.
Revenues from product sales to third parties, which represented 91% and 92% of
total net revenues for the three and nine months ended June 30, 2002,
respectively, increased 142.1% and 79.9%, respectively, from the comparable
periods of 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. Revenues attributable to Alpha
for the three days post merger were approximately $6 million.
Revenues from wafer fabrication and semiconductor assembly and test services
provided to Conexant, which represented 9% and 8% of total revenues for the
three and nine months ended June 30, 2002, respectively, increased 20.7% and
decreased 34.6% respectively, from the comparable periods of fiscal 2001. The
increase during the three months ended June 30, 2002 when compared to the
comparable period of fiscal 2001 is primarily attributable to the improvement in
the level of excess channel inventories that had adversely affected the digital
cellular handset markets during fiscal 2001. The decrease during the nine months
ended June 30, 2002 when compared to the comparable period of fiscal 2001
principally reflects lower demand during the first two quarters of fiscal 2002
for assembly and test services from Conexant's Mindspeed Technologies and
broadband access businesses due to the broad slowdown affecting most of the
communications electronics end-markets for Conexant's products.
GROSS MARGIN
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
----------------------------- -------------------------------
2002 CHANGE 2001 2002 CHANGE 2001
------- ------ -------- ------- ------ --------
(in thousands)
Gross margin:
Third parties.. $16,698 nm $(12,827) $61,412 nm $(67,575)
% of net revenues from third parties 16.3% (30.3)% 21.7% (42.9)%
Conexant....... $ 3,365 nm $ 413 $ 4,038 nm $ 1,715
% of net revenues from Conexant 31.9% 4.7% 16.8% 4.7%
- ----------
nm= not meaningful
20
Skyworks Solutions, Inc. and Subsidiaries
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, warranties and sustaining engineering expenses
pertaining to products sold. In the past, we purchased a portion of our
requirements for complementary metal-oxide semiconductor, or CMOS, wafers from
Conexant at Conexant's actual cost. In the current quarter and first nine months
of fiscal 2002, approximately 29% and 34%, respectively, of cost of goods sold
represented the value of products supplied by Conexant, which were charged to us
at Conexant's actual cost. Because we and Conexant incur substantial fixed costs
to maintain our own manufacturing facilities, in periods of lower utilization of
these manufacturing facilities, unit costs have increased. Cost of goods sold
also includes allocations from Conexant through June 25, 2002 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 from third party sales for the first nine months
of fiscal 2002, compared with the first nine months of fiscal 2001, reflects
increased revenues, improved utilization of our manufacturing facilities and a
decrease in quarterly depreciation expense of approximately $3.5 million that
resulted from the write-down of the Newbury Park wafer fabrication assets in the
third quarter of fiscal 2001. 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 for the first
nine months of fiscal 2002 was also adversely impacted by additional warranty
costs of $14.0 million. The additional warranty costs were the result of an
agreement with a major customer for the reimbursement of costs 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 additional costs
are expected to be incurred in connection with this issue. Gross margin for the
three and nine months ended June 30, 2002 benefited by approximately $1.3
million and $10.0 million, respectively, as a result of the sale of inventories
having a historical cost of $1.3 million and $10.0 million, respectively, that
were written down to a zero cost basis during fiscal year 2001: such sales
resulted from sharply increased demand beginning in the fourth quarter of fiscal
2001 that was not anticipated at the time of the write-downs. Excluding the
effect of the additional warranty cost and the sale of the zero-cost basis
inventories, gross margin for the three and nine months ended June 30, 2002 was
approximately $33.0 million, or 32% of net revenues from third parties, and
$80.4 million, or 28% of net revenues from third parties, respectively. Gross
margin for the first nine months of fiscal 2001 was adversely affected by
inventory write-downs of approximately $58.7 million.
The inventory write-downs recorded in the first nine months of fiscal 2001
resulted from the sharply reduced end-customer demand we experienced, primarily
associated with our radio frequency components, as a result of the rapidly
changing demand environment for digital cellular handsets 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.
We assess the recoverability of inventories 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, we write down the value of those inventories which, at the
time of our review, we expect to be unable to sell. We sell our products to
communications equipment 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.
21
Skyworks Solutions, Inc. and Subsidiaries
Through June 30, 2002, we sold an additional $10.0 million of inventories
previously written down to a zero cost basis. As of June 30, 2002, we continued
to hold inventories with an original cost of approximately $9.7 million which
were previously written down to a zero cost basis. We currently intend to hold
these remaining inventories and will sell these inventories if we experience
renewed demand for these products. While there can be no assurance that we will
be able to do so, if we are able to sell a portion of the inventories that are
carried at zero cost basis, our gross margins will be favorably affected. To the
extent that we do not experience renewed demand for the remaining inventories,
they will be scrapped as they become obsolete. No inventory was scrapped during
the first nine months of fiscal 2002.
We base our assessment of the recoverability of inventories, and the amounts of
any write-downs, on currently available information and assumptions about future
demand (generally over six months) and market conditions. 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.
Under supply agreements entered into in connection with the merger with
Conexant, we will receive wafer fabrication, wafer probe and certain other
services from the Newport Beach, California foundry joint venture's Newport
Beach wafer fabrication facility and we will provide wafer fabrication, wafer
probe, final test and other services to Conexant at our Newbury Park facility,
in each case, for a three-year period after the merger. We will also provide
semiconductor assembly and test services to Conexant at our Mexicali facility.
The price for the services under the agreements in the first year will be the
actual cost of the services. In the second year the price will be the average of
(1) the actual cost in the first year and (2) the market price (determined prior
to the start of the second year) of the services. In the third year the price
will be based on the market price of the services.
During the term of the supply agreements with the Newport Beach, California
foundry joint venture, our unit cost of goods supplied by the Newport Beach
foundry joint venture will continue to be affected by the level of utilization
of the Newport Beach foundry joint venture's wafer fabrication facility and
other factors outside our control. Under these supply agreements, we are
committed to obtain a minimum level of service from the Newport Beach,
California foundry joint venture. We estimate that our obligation under these
agreements will result in excess costs of approximately $13.3 million and we
have recorded this liability in the current period. In addition, 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.
We have historically sold gallium arsenide semiconductors to Conexant at cost
and have provided semiconductor assembly and test services to Conexant at
approximately 5% over cost. Our overall gross margin on sales to Conexant has
been approximately 5% of net revenues. During the third quarter of fiscal 2002,
we recognized additional margin as a result of the cumulative effect of a change
in the transfer pricing arrangement from 5% to 8%.
RESEARCH AND DEVELOPMENT
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
------------------------------- -----------------------------
2002 CHANGE 2001 2002 CHANGE 2001
-------- ------ -------- -------- ------ -------
(in thousands)
Research and development $ 31,653 19.1% $ 26,571 $ 95,454 15.1% $82,954
% of net revenues 28.0% 52.1% 31.1% 42.8%
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 also include allocated costs
for shared research and development services provided by Conexant through June
25, 2002, 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 for the three and nine months
ended June 30, 2002 compared to the similar periods of fiscal 2001 primarily
reflects the opening of a new design center in Le Mans, France and
22
Skyworks Solutions, Inc. and Subsidiaries
higher headcount and personnel-related costs. Subsequent to the first quarter of
fiscal 2001, we expanded customer support engagements as well as development
efforts targeted at components and full system solutions using the CDMA2000,
GSM, General Packet Radio Services, or GPRS, and third-generation, or 3G,
wireless standards in both the digital cellular handset and infrastructure
markets.
Under a transition services agreement entered into in connection with the merger
with Conexant, Conexant will continue to perform various research and
development services for us at actual cost until December 31, 2002, unless the
parties otherwise agree. To the extent we use these services subsequent to the
expiration of the specified term, the pricing is subject to negotiation.
SELLING, GENERAL AND ADMINISTRATIVE
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
------------------------------- -----------------------------
2002 CHANGE 2001 2002 CHANGE 2001
-------- ------ -------- ------ ------ -------
(in thousands)
Selling, general and administrative $ 10,380 (18.1%) $ 12,681 32,382 (30.8%) $46,769
% of net revenues 9.2% 24.8% 10.5% 24.1%
Selling, general and administrative expenses include personnel costs, sales
representative commissions, advertising and other marketing costs. Selling,
general and administrative expenses also include allocated general and
administrative expenses from Conexant through June 25, 2002 for a variety of
shared functions, including legal, accounting, treasury, human resources, real
estate, information systems, customer service, sales, marketing, field
application engineering and other corporate services.
The decrease in selling, general and administrative expenses for the three and
nine months ended June 30, 2002 compared to the comparable three and nine months
of fiscal 2001 primarily reflects lower headcount and personnel-related costs
resulting from the expense reduction and restructuring actions initiated during
fiscal 2001 and lower provisions for uncollectible accounts receivable.
Under the transition services agreement, Conexant will continue to perform
various services for us at actual cost until December 31, 2002, unless the
parties otherwise agree. To the extent we use these services subsequent to the
expiration of the specified term, the pricing is subject to negotiation.
AMORTIZATION OF INTANGIBLE ASSETS
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 CHANGE 2001 2002 CHANGE 2001
------ ------ ------- ------ ------ -------
(in thousands)
Amortization of intangible assets $3,579 (6.0%) $ 3,808 11,523 1.5% $11,352
% of net revenues 3.2% 7.5% 3.8% 5.9%
In connection with the fiscal 2000 acquisition of Philsar, we recorded an
aggregate of $78.2 million of identified intangible assets and goodwill. These
assets have been amortized over their estimated useful lives (principally five
years).
The higher amortization expense in the three and nine months ended June 30, 2002
primarily resulted from the additional consideration for the acquisition of
Philsar paid during fiscal 2001 upon the expiration of an indemnification
period. The value of the additional consideration paid was added to the recorded
amounts of goodwill and has been amortized over the remainder of the original
estimated lives of the goodwill.
During the third quarter of fiscal 2002, the Company recorded a $45.8 million
charge for the write-off of goodwill and other intangible assets associated with
our acquisition of the Philsar Bluetooth business. Management has determined
that the Company will not support the technology associated with the Philsar
Bluetooth business. Accordingly, this product line will be discontinued and the
employees associated with the product line have either
23
Skyworks Solutions, Inc. and Subsidiaries
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 been impaired.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisition of Alpha Industries, Inc. in the third
quarter of fiscal 2002, $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 products under development had not been established
and no future alternative uses existed.
Alpha was in the process of developing new technologies in its semiconductor and
ceramics segments. The objective of the in-process research and development
effort was to develop new semiconductor processes, ceramic materials and related
products to satisfy customer requirements in the wireless and broadband markets.
The following table summarizes the significant assumptions underlying the
valuations of the Alpha in-process research and development (IPR&D) at the time
of acquisition.
Estimated costs to Discount rate
(in millions) Date Acquired IPRD complete projects applied to IPRD
------------- ---- ----------------- ---------------
Alpha June 25, 2002 $65.5 $11.6 30%
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 difference
types of wireless handsets. The main performance attributes of these
amplifiers are efficiency, power output, voltage of operation 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 more integrated
solutions.
Control Products
Control products consist of switches and switch filters that are used
in wireless applications for channeling the signal. 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 and millimeter
wave semiconductors and components designed and manufactured
specifically to address the needs of the high-speed, wireline and
wireless internet 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 (two terminal
semiconductor devices) for use in a variety of radio frequency 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 which 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.
24
Skyworks Solutions, Inc. and Subsidiaries
The material risks associated with the successful completion of the in-process
technology are associated with the Company's ability to successfully finish the
creation of viable prototypes and successful design of the chips, masks and
manufacturing processes required. The Company expects to benefit from the
in-process projects as the individual products that contain the in-process
technology are put into production and sold to end-users. The release dates for
each of the products within the product families are varied. The fair value of
the in-process research and development was determined using the income
approach. Under the income approach, the fair value reflects the present value
of the projected cash flows that are expected to be generated by the products
incorporating the in-process research and development, if successful.
The projected cash flows were discounted to approximate fair value. The weighted
average discount rate applicable to the cash flows of each project reflects the
stage of completion and other risks inherent in each project. The discount rate
used in the valuation of in-process research and development was 30 percent. The
IPR&D projects were expected to commence generating cash flows in fiscal 2003.
OTHER INCOME, NET
Other income, net is comprised primarily of 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.
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. 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 the 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. Consequently, no United States income tax benefit has been
recognized relating to the U.S. operating losses. As of June 30, 2002, 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 (credit) provision for income taxes for the three and nine months ended June
30, 2002 and the comparable periods in fiscal 2001 consist 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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Conexant has managed cash on a centralized basis. Cash receipts
associated with Washington/Mexicali's business were generally collected by
Conexant, and Conexant generally made disbursements on behalf of
Washington/Mexicali. Cash, cash equivalents and short-term investments at June
30, 2002 and September 30, 2001 totaled $90.7 million and $2.0 million,
respectively. Working capital (deficit) at June 30, 2002 was approximately
($101.6) million compared to $60.5 million at September 30, 2001.
Cash used in operating activities was $39.8 million and $65.8 million for the
nine months of fiscal 2002 and 2001, respectively. Operating cash flows for the
nine months of fiscal 2002 and 2001 reflect net losses of $235 million and $297
million, respectively, offset by non-cash charges (depreciation and
amortization, asset impairments and an in-process research and development
charge) of $224.3 million and $144.4 million, respectively, and net decreases
(increases) in
the non-cash components of working capital of approximately $(7.4) million and
$21.8 million, respectively.
Cash provided by investing activities for the first nine months of fiscal 2002
consisted of capital expenditures of $21.4 million and dividends to Conexant of
$3.1 million offset by cash received of $102.5 million in the acquisition of
Alpha. Cash used in investing activities for the first nine months of fiscal
2001 consisted of capital expenditures of $50.7 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.
25
Skyworks Solutions, Inc. and Subsidiaries
Cash provided by financing activities consisted of net transfers from Conexant
of $50.4 million and $116.4 million for the first nine months of fiscal 2002 and
2001, respectively.
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 its 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 its wireless communications products and
to support increasing demand for assembly and test services from Conexant. We do
not expect to continue to invest in increasing Mexicali's capacity.
Capital investments for the Newbury Park wafer fabrication facility totaled
$35.5 million, $27.3 million and $0.7 million during fiscal 2000, fiscal 2001
and the first nine months of fiscal 2002, 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.
Ongoing changes in end-user demand and fluctuations in the levels of channel
inventories have reduced visibility into future demand and we expect that these
and other factors will continue to affect our revenues in fiscal 2002. We also
believe that ongoing underutilization of our manufacturing capacity will
adversely affect our gross margin and operating profit. Consequently, we
anticipate that we will continue to experience negative cash flows from
operations in the near term.
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.
The Company has $150 million in short-term promissory notes payable to Conexant
for the purchase of the Mexicali operations. The notes are secured by the assets
of the Company. Unless paid earlier at the option of the Company or pursuant to
mandatory prepayment provisions in the financing agreement, fifty percent of the
principal portion of the short-term promissory notes is due on March 24, 2003,
and the remaining fifty percent of the notes is due on June 24, 2003. Interest
on these notes is 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.
In addition, the Company has available a short-term $100 million revolving loan
facility from Conexant 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 revolving facility will be
available if the Company has more than $150 million of eligible domestic
receivables. The entire principal of any revolving amounts borrowed is due on
June 24, 2003. There have been no borrowings to date under this revolving
facility.
We will be required to raise capital to satisfy our working capital needs and to
repay the $150 million short-term note delivered to Conexant in payment of the
purchase price of the Mexicali operations and amounts outstanding, if any, under
the revolving loans under the financing agreement with Conexant. We will likely
seek to raise capital through a public or private offering of equity, debt or
some combination thereof within the next nine months. Moreover, under the terms
of the short-term note, we must use 100% of the proceeds from asset sales or
other dispositions of property or from the issuance of debt or equity to prepay
the amount outstanding under the note until paid in full. In addition, we may be
limited in the amount of stock that we can issue to raise additional capital in
the two years subsequent to the merger because of the change in control
limitation imposed by Section 355 (e) of the Internal Revenue Code.
It is customary practice in the semiconductor industry to enter into guaranteed
purchase commitments or "take or pay" arrangements for the purchase of certain
equipment or raw materials. At June 30, 2002, obligations under these
26
Skyworks Solutions, Inc. and Subsidiaries
arrangements, except for the supply agreement with Newport Beach, California
foundry joint venture, were not material to our consolidated financial
statements. The table below summarizes aggregate maturities of debt, future
minimum lease payments under noncancelable operating leases and purchase
commitments as of June 30, 2002.
REMAINDER AFTER
CONTRACTUAL OBLIGATIONS TOTAL OF 2002 2-3 YEARS 4-5 YEARS 5 YEARS
- ----------------------- ----- ---------- --------- --------- -------
Guaranteed purchase commitments $119.5 $ 18.2 $101.3 $ -- $ --
Debt 150.0 -- 150.0 -- --
Operating leases 15.8 1.3 8.6 4.6 1.3
------ -------- ------ -------- -----
Total $285.3 $ 19.5 $259.9 $ 4.6 $ 1.3
====== ======== ====== ======== =====
IMPACT OF RECENTLY-ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that all
business combinations be accounted for using the purchase method and provides
new criteria for recording intangible assets separately from goodwill. Existing
goodwill and intangible assets will be evaluated against these new criteria,
which may result in certain intangible assets being subsumed into goodwill. SFAS
142 addresses financial accounting and reporting for acquired goodwill and other
intangible assets. Goodwill and intangible assets that have indefinite useful
lives will not be amortized into results of operations, but instead will be
evaluated at least annually for impairment and written down when the recorded
value exceeds the estimated fair value. We will adopt SFAS 142 on October 1,
2002. We will be required to perform a transitional impairment test for goodwill
as of that date. It is likely that we will record a substantial transitional
impairment charge as a result of adopting SFAS 142. The carrying value of
goodwill and unamortized intangible assets, subject to the transitional
impairment test, is approximately $906.5 million at June 30, 2002.
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. We do not
believe the impact of adopting SFAS No. 145 will have a material impact on our
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 activities initiated after December 31, 2002. We
are assessing the impact adoption of SFAS No. 146 will have on our financial
statements.
27
Skyworks Solutions, Inc. and Subsidiaries
OTHER MATTERS
Safe Harbor Statement - Except for the historical information, this report
contains forward-looking statements. These statements reflect our current
expectations and predictions of future results, accomplishments and other
matters, all of which are inherently subject to risks and uncertainties. Actual
results may differ materially from those anticipated in forward-looking
statements, based on various factors. Such factors include, but are not limited
to: variations in projected financial results for the fourth quarter of fiscal
year 2002 and fiscal year 2002, expected benefit, timing and success of our
product development efforts, our ability to maintain and improve product yields,
to participate in new wireless interface standards and applications, and to
develop and market new products and technologies, the timing and extent of
recovery in the infrastructure, broadband and wireless markets, the success of
our various strategic relationships, our ability to predict customer orders, the
disproportionate impact of our business relationships with our larger customers,
erosion of selling prices or margins, modification of our plans or intentions,
and market developments, competitive pressures and changes in economic
conditions that vary from our expectations. Furthermore, additional factors
relate to our merger with the wireless communications business of Conexant,
including but not limited to the following: the expected benefits of the merger,
our ability to successfully integrate the merged businesses, operations,
personnel and customers, and our ability to accurately forecast the financial
results and prospects of the post-merger enterprise. Additional information on
these and other factors that may cause actual results and our performance to
differ materially is included in the Company's registration statement on Form
S-3 filed with the Securities and Exchange Commission on July 15, 2002 and the
periodic reports filed with the Securities and Exchange Commission, including
but not limited to our Form 10-K for the year ended March 31, 2002. Copies may
be obtained by contacting the Company or the SEC. We caution readers not to
place undue reliance upon any such forward-looking statements, which speak only
as of the date made. We do not undertake or accept any obligation or undertaking
to release publicly any updates or revisions to any forward-looking statement to
reflect any change in our expectations or any change in events, conditions or
circumstance on which any such statement is based.
FORWARD-LOOKING STATEMENTS
This report and other documents we have filed with the Securities and Exchange
Commission contain forward-looking statements made pursuant to the safe harbor
provisions 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 those 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 HAVE RECENTLY INCURRED SUBSTANTIAL OPERATING LOSSES AND ANTICIPATE FUTURE
LOSSES. During the nine months ended June 30, 2002, our operating results were
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 a net loss
of approximately $234.6 million during the nine months ended June 30, 2002.
During the nine months ended June 30, 2002, we implemented a number of expense
reduction initiatives, including a work force reduction, a modification of
employee work schedules and reduced discretionary spending. 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 return to profitability, 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 return to profitability 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. The wireless communications
semiconductor industry 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. From time to time these and
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Skyworks Solutions, Inc. and Subsidiaries
other factors, together with changes in general economic conditions, cause
significant upturns and downturns in the industry. Periods of industry downturns
- -- as we experienced through most of calendar year 2001 -- have been
characterized by diminished product demand, production overcapacity, high
inventory levels and accelerated erosion of average selling prices. These
factors, and in particular 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'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. During 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 that reduced
end-customer demand, underutilization of the our manufacturing capacity, changes
in revenue mix and other factors will continue to adversely affect our operating
results in the near term.
WE ARE SUBJECT TO 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 us 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 and is expected to continue to result in declining
average selling prices for our products. We also anticipate that additional
competitors will 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. Moreover, as
with many companies in the semiconductor industry, customers for certain of our
products offer products that compete with products that are offered by us.
We believe that the principal competitive factors for semiconductor suppliers in
our market include, among others:
- time-to-market;
- new product innovation;
- product quality, reliability and performance;
- price;
- compliance with industry standards;
- strategic relationships with customers; and
- protection of intellectual property.
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; and
- greater financial, sales and marketing, manufacturing, distribution,
technical or other resources.
As a result, certain competitors may be able to adapt more quickly than us 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 or other third parties. These relationships may affect customers'
purchasing decisions. Accordingly, it is possible that new competitors or
alliances among competitors could emerge and rapidly acquire significant market
share. We cannot assure you that we will be able to compete successfully against
current and potential competitors.
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Skyworks Solutions, Inc. and Subsidiaries
A number of our competitors have combined with each other and consolidated their
businesses, including the consolidation of competitors with our customers. This
consolidation is attributable to a number of factors, including the historically
high-growth nature of the communications electronics industry and the
time-to-market pressures on suppliers to decrease the time required for product
conception, research and development, sampling and production launch before a
product reaches the market. This consolidation trend is expected to continue,
since investments, alliances and acquisitions may enable semiconductor
suppliers, including us and our competitors, to achieve economies of scale, to
augment technical capabilities or to achieve faster time-to-market for their
products than would be possible solely through internal development.
This consolidation is creating entities with increased market share, customer
base, technology and marketing expertise in markets in which we compete. These
developments may adversely affect the markets we seek to serve and our ability
to compete successfully in those markets.
OUR SUCCESS WILL DEPEND UPON OUR ABILITY TO DEVELOP NEW PRODUCTS AND REDUCE
COSTS IN A TIMELY MANNER. The markets into which we sell demand cutting-edge
technologies and new and innovative products. Our operating results will depend
largely on our ability to continue to introduce new and enhanced products on a
timely basis. Successful product development and introduction depends on
numerous factors, including, among others:
- 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
- overall market acceptance of our products.
We cannot assure you that we will have sufficient resources to make the
substantial investment in research and development in order to develop and bring
to market new and enhanced products in a timely manner. We will be required
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.
In addition, prices of established products may decline, sometimes
significantly, over time. We believe that in order 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 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 changes in customer requirements;
- frequent new product introductions and enhancements;
- short product life cycles with declining prices over the life cycle of
the product; and
- evolving industry standards.
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
related to our products or in market demand for products based on a particular
technology, particularly due 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
obsolescence of our products.
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Skyworks Solutions, Inc. and Subsidiaries
OUR SUCCESS DEPENDS, IN PART, ON OUR ABILITY TO OBTAIN SUITABLE FINANCING
Immediately following the completion of the merger, the Company purchased
Conexant's semiconductor assembly, module manufacturing and test facility,
located in Mexicali, Mexico, and certain related operations for $150 million.
This purchase price was paid with short-term promissory notes delivered by the
Company to Conexant, which are secured by all of the assets of the Company.
Unless paid earlier at the option of the Company or pursuant to mandatory
prepayment provisions in the financing agreement, fifty percent of the principal
portion of the short-term promissory notes is due on March 24, 2003, and the
remaining fifty percent of the notes is due on June 24, 2003.
In addition, the Company has incurred expenses and has assumed obligations as a
result of this merger. The Company estimates that these expenses and obligations
will require cash of approximately $80 million and the issuance of a warrant to
purchase approximately one million shares of the Company's common stock. These
amounts are primarily associated with transaction and merger costs, deposits,
and restructuring costs.
In addition to the short-term promissory notes related to the Company's purchase
of the Mexicali operations, Conexant committed to make a short-term $100 million
revolving loan facility available to the Company to fund the Company's working
capital and other requirements. $75 million of this facility will be available
on or after July 10, 2002, and the remaining $25 million balance of the
revolving facility will be available if the Company has more than $150 million
of eligible domestic receivables. The entire principal of any revolving amounts
borrowed is due on June 24, 2003.
The Company's ability to meet these expenses, the expenses of our ongoing
operations, and to repay the debt owed to Conexant is dependent upon our ability
to obtain suitable financing. 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 the Company seeks financing will affect our ability to
raise capital, as well as the terms of any financing. The Company 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.
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.
Our future 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. We cannot assure you that we will be able to attract and
retain qualified management and other personnel necessary for the design,
development, manufacture and sale of our products.
We may have particular difficulty attracting and retaining key personnel during
periods of poor operating performance, given, among other things, the use of
equity-based compensation by us and our competitors. The loss of the services of
one or more of our key employees, including David J. Aldrich, our chief
executive officer, or certain key design and technical personnel, 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.
Our products will not be sold directly to the end-user but will be components of
other products. As a result, we will rely on OEMs 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, we
would have difficulty selling our products. Once an OEM designs another
supplier'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 for that OEM. 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 the our products, for example, if its own products are not
commercially successful or for any other reason. We may be unable to achieve
design wins or to convert design wins into actual sales.
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Skyworks Solutions, Inc. and Subsidiaries
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 customers may need three to six months to test and evaluate our products and
an additional three to six months to begin volume production of equipment that
incorporates our products. The lengthy period of 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, and
selling, general and administrative expenses before we generate the related
revenues for these products, and we may never generate the anticipated revenues
if our customer cancels or changes its product plans.
UNCERTAINTIES INVOLVING THE ORDERING AND SHIPMENT OF OUR PRODUCTS COULD
ADVERSELY AFFECT OUR BUSINESS. Our sales 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 to shipment. In addition, 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 of anticipated
orders to materialize could result in us holding excess or obsolete inventory,
which could result in write-downs of inventory.
OUR RELIANCE ON A SMALL NUMBER OF CUSTOMERS FOR A LARGE PORTION OF OUR SALES
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF 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, our business would be materially and
adversely affected. Sales to Samsung Electronics co. LTD. represented
approximately 45% of net revenues from third parties during the first nine
months of fiscal 2002. Our future operating results will depend on the success
of this and other customers and our success in selling products to them.
OUR MANUFACTURING PROCESSES ARE EXTREMELY COMPLEX AND SPECIALIZED. Our
manufacturing operations are complex and subject to disruption due to 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,
errors in any step of the fabrication process, defects in the masks used to
print circuits on a wafer 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.
Our operating results are highly dependent upon our ability to produce
integrated circuits at acceptable manufacturing yields. 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 or other natural
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 of delays, we cannot assure you that the required
alternate capacity, particularly wafer production capacity, would be available
on a timely basis or at all. Even if alternate wafer production 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, Woburn, Massachusetts semiconductor wafer fabrication facilities or
the semiconductor assembly and test facility in Mexicali, Mexico, alternate
gallium arsenide production capacity would not be immediately available from
third-party sources. These disruptions could have a material adverse effect on
our business, financial condition and results of operations.
WE MAY NOT BE ABLE TO ACHIEVE MANUFACTURING YIELDS THAT CONTRIBUTE POSITIVELY TO
OUR GROSS MARGIN AND PROFITABILITY. Minor deviations 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
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Skyworks Solutions, Inc. and Subsidiaries
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 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 also will 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 SUBJECT TO THE RISKS OF DOING BUSINESS INTERNATIONALLY. For the first
nine months of fiscal 2002, approximately 96% of the Company's net revenues from
third parties were from customers located outside the United States, primarily
countries located in the Asia-Pacific region and Europe. In addition, we have
suppliers located outside the United States and third-party packaging, assembly
and test facilities and foundries located in the Asia-Pacific region. 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;
- 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; and
- limitations 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, we 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. 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 manufactured and sold by
our customers, principally digital cellular handsets;
- 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.
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Skyworks Solutions, Inc. and Subsidiaries
The foregoing factors are difficult to forecast, and these, as well as other
factors, could materially adversely affect our quarterly or annual operating
results. If our operating results fail to meet the expectations of analysts or
investors, it could materially and adversely affect the price of our common
stock.
OUR GALLIUM ARSENIDE SEMICONDUCTORS MAY NOT CONTINUE TO BE COMPETITIVE WITH
SILICON ALTERNATIVES. We manufacture and sell gallium arsenide semiconductors,
principally power amplifiers and switches. The production of gallium arsenide
integrated circuits is more costly than the production of silicon circuits. As a
result, we must offer gallium arsenide products that provide superior
performance to that of silicon for specific applications to be competitive with
silicon products. If we do not continue to offer products that provide
sufficiently superior performance to offset the cost differential, our operating
results may be materially and adversely affected. It is expected that the costs
of producing gallium arsenide integrated circuits will continue to exceed the
costs associated with the production of 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. 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 superior to that offered by silicon solutions.
THE VALUE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED BY MARKET VOLATILITY.
The trading price of our common stock may fluctuate significantly. This price
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
- 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 adversely affect the market price of our
common stock.
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 LOSS OF OUR INTELLECTUAL PROPERTY RIGHTS. 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. Any
litigation to determine the validity of claims our products infringe or may
infringe these rights, 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;
- discontinue the use of infringing technology;
- expend significant resources to develop non-infringing technology; or
- license technology from the third party claiming infringement, which
license may not be available on commercially reasonable terms.
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, devices, algorithms and processes. In addition, we often
incorporate the intellectual property of our customers, suppliers or
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Skyworks Solutions, Inc. and Subsidiaries
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 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.
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 patents
fails to protect our technology, it would make it easier for our competitors to
offer similar products. 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. THE COMPANY'S MERGER WITH THE WIRELESS BUSINESS OF CONEXANT SYSTEMS,
INC. PRESENTS SUCH RISKS.
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 attention from other business concerns.
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 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.
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Skyworks Solutions, Inc. and Subsidiaries
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 in manufacturing operations and have been or will 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.
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Skyworks Solutions, Inc. and Subsidiaries
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents. Our main investment
objectives are the preservation of investment capital and the maximization of
after-tax returns on our investment portfolio. Consequently, we invest with only
high-credit-quality issuers and limits the amount of our credit exposure to any
one issuer.
Our cash and cash equivalents are not subject to significant interest rate risk
due to the short maturities of these instruments. As of June 30, 2002, the
carrying value of our cash and cash equivalents approximates fair value.
We do not expect that changes in foreign currency exchange rates will have a
material effect on our financial position or results of operations, as the
majority of our revenues and expenses are denominated in U.S. dollars. When
exposures to foreign exchange risk arise, we may use hedging strategies,
including foreign currency forward exchange contracts, to manage our foreign
exchange risk. As of June 30, 2002, we had no obligations under any forward
exchange contracts. We limit our use of derivative financial instruments to
specific risk management strategies. We do not use derivative instruments for
speculative or investment purposes.
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Skyworks Solutions, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 13, 2002 the Company held a Special Meeting of Stockholders
resulting in the following:
(a) Adopted a proposal to adopt the Agreement and Plan of
Reorganization, dated as of December 16, 2001, as amended on
April 12, 2002 (the "Merger Agreement"), by and among Conexant
Systems, Inc., Washington Sub, Inc. and Alpha Industries, Inc.
and the merger provided for by the Merger Agreement, pursuant to
which Washington, which will hold the wireless communications
business of Conexant (excluding certain assets and liabilities),
will merger with and into Alpha Industries, Inc., with Alpha
surviving the merger was approved with the following vote:
33,249,131 for, 1,420,157 against and 155,038 abstained.
(b) Adopted a proposal to approve an amendment to Alpha's 1996
Long-Term Incentive Plan to increase the number of shares of
common stock that may be issued under the plan by 1,885,000
shares (from 4,200,000 shares to 6,085,000 shares) was approved
with the following vote: 30,003,798 for, 9,628,508 against and
191,411 abstained.
(c) Adopted a proposal to approve an amendment to Alpha's Directors
2001 Stock Option Plan to increase the number of shares of common
stock that may be issued under the plan by 315,000 shares (from
250,000 shares to 565,000 shares) was approved with the following
vote: 34,613,961 for, 5,012,315 against and 192,441 abstained.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER DESCRIPTION
------ -----------
99 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On March 15, 2002, we filed a Report on Form 8-K dated March 15,
2002, to announce our signing of a definitive agreement to
acquire all of the outstanding capital stock of Aimta, Inc., a
developer of Low Temperature Co-Fired Ceramics for wireless
handsets.
On May 2, 2002 we filed a Report on Form 8-K dated April 30,
2002, to incorporate by reference our press release dated April
30, 2002.
On June 28, 2002, we filed a Report on Form 8-K dated June 25,
2002, to announce completion of our merger with the wireless
communications division of Conexant Systems, Inc.
38
Skyworks Solutions, Inc. and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 9, 2002
SKYWORKS SOLUTIONS, INC. AND SUBSIDIARIES
Registrant
/s/ David J. Aldrich
--------------------------------------------
David J. Aldrich
Chief Executive Officer
President
Director
/s/ Paul E. Vincent
--------------------------------------------
Paul E. Vincent
Chief Financial Officer
Principal Financial Officer
Principal Accounting Officer
Secretary
39
Skyworks Solutions, Inc. and Subsidiaries
EXHIBIT INDEX
NUMBER DESCRIPTION
- ------ -----------
99 Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes- Oxley Act of 2002
40