NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Skyworks Solutions, Inc. together with its consolidated subsidiaries, (“Skyworks” or the “Company”) is an innovator of high performance analog semiconductors. Leveraging core technologies, Skyworks supports automotive, broadband, cellular infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. The Company's portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics.
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures, normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), have been condensed or omitted pursuant to those rules and regulations. However, in management's opinion, the financial information reflects all adjustments, including those of a normal recurring nature necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods presented. The financial position, results of operations, and cash flows of the Company for the interim periods are not necessarily indicative of those expected for the full year. This information should be read in conjunction with the Company's financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended
September 28, 2012
, filed with the SEC on November 21, 2012 (the "2012 10-K"), as amended by Amendment No. 1 to the 2012 10-K, filed with the SEC on January 28, 2013.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, expenses, comprehensive income and accumulated other comprehensive loss that are reported in these unaudited consolidated financial statements and accompanying disclosures. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Significant judgment is required in determining the recognition and/or disclosure of reserves for and fair value of items such as inventory, income taxes, share-based compensation, loss contingencies, subsequent events (which the Company has evaluated through the date of issuance of these unaudited consolidated financial statements), bad debt allowances, contingent consideration, intangible assets associated with business combinations, and overall fair value assessments of assets and liabilities, particularly those classified as Level 2 or Level 3 in the fair value hierarchy. In addition, significant judgment is required in determining whether a potential indicator of impairment of long-lived assets exists and in estimating future cash flows for any necessary impairment tests. Actual results could significantly differ from these estimates.
The Company's fiscal year ends on the Friday closest to September 30. Fiscal 2013 consists of
52
weeks and ends on
September 27, 2013
. Fiscal 2012 consisted of
52
weeks and ended on
September 28, 2012
. The
third
quarters of fiscal 2013 and fiscal 2012 each consisted of
13
weeks and ended on
June 28, 2013
and
June 29, 2012
, respectively.
2. MARKETABLE SECURITIES
At June 28, 2013, the Company's marketable securities consisted of an auction rate security ("ARS"), which was classified as available for sale and recorded in other long term assets. The ARS had a par value of
$3.2 million
and a carrying value of
$2.3 million
at June 28, 2013 as compared to the September 28, 2012 balances of
$4.0 million
and
$3.1 million
, respectively. The decrease in the balance held at
June 28, 2013
was due to the sale of an ARS instrument during the period with a carrying value of
$0.8 million
. The remaining ARS instrument is scheduled to mature in 2017. The current difference between the par and carrying value is categorized as a temporary loss in accumulated other comprehensive loss. The Company receives scheduled interest payments on the ARS in accordance with the terms of the securities and evaluates the appropriate accounting treatment in each period presented.
3. FAIR VALUE
Fair value is the price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. GAAP provides a hierarchy for inputs used in measuring fair value that prioritize the use of observable inputs over the use of unobservable inputs, when such observable inputs are available. The three levels of inputs that may be used to measure fair value are as follows:
|
|
•
|
Level 1 - Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data.
|
|
|
•
|
Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by the Company.
|
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observable inputs may result in a reclassification of assets and liabilities within the three levels of the hierarchy outlined above.
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company measures certain assets and liabilities at fair value on a recurring basis such as our financial instruments and marketable securities and recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred. There were no transfers between Level 1, 2 or 3 assets or liabilities during the
three and nine months ended
June 28, 2013
.
Due to the illiquid markets for the Company's ARS, the Company believes that these securities are appropriately classified as a Level 3 asset at June 28, 2013.
At
June 28, 2013
, assets recorded at fair value on a recurring basis consist of the following (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant
Other
Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
Money market funds
|
$
|
158.8
|
|
|
$
|
158.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Auction rate securities
|
2.3
|
|
|
—
|
|
|
—
|
|
|
2.3
|
|
Total
|
$
|
161.1
|
|
|
$
|
158.8
|
|
|
$
|
—
|
|
|
$
|
2.3
|
|
The following table summarizes changes to the fair value of the ARS, which is a Level 3 asset (in millions):
|
|
|
|
|
|
|
|
Auction Rate Securities
|
Balance at September 28, 2012
|
|
$
|
3.1
|
|
Sale of auction rate securities
|
|
(0.8
|
)
|
Balance at June 28, 2013
|
|
$
|
2.3
|
|
The fair value of the contingent consideration which was recorded as a Level 3 liability on September 28, 2012 was earned and paid during the period ended
June 28, 2013
. The Company has no further contingent consideration liabilities associated with prior acquisitions at June 28, 2013.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company's non-financial assets and liabilities, such as goodwill, intangible assets, and other long-lived assets resulting from business combinations are measured at fair value using income approach valuation methodologies at the date of acquisition and subsequently re-measured if there are indicators of impairment. There were no indicators of impairment identified during the
three and nine months ended
June 28, 2013
.
4. INVENTORY
Inventory consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of
|
|
June 28, 2013
|
|
September 28, 2012
|
Raw materials
|
$
|
26.2
|
|
|
$
|
27.2
|
|
Work-in-process
|
134.7
|
|
|
111.2
|
|
Finished goods
|
62.5
|
|
|
83.0
|
|
Finished goods held on consignment by customers
|
8.9
|
|
|
11.5
|
|
Total inventory
|
$
|
232.3
|
|
|
$
|
232.9
|
|
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of
|
|
June 28, 2013
|
|
September 28, 2012
|
Land and improvements
|
$
|
12.0
|
|
|
$
|
12.0
|
|
Buildings and improvements
|
60.0
|
|
|
57.0
|
|
Furniture and fixtures
|
24.6
|
|
|
25.4
|
|
Machinery and equipment
|
648.6
|
|
|
623.3
|
|
Construction in progress
|
79.4
|
|
|
36.9
|
|
Total property, plant and equipment, gross
|
824.6
|
|
|
754.6
|
|
Accumulated depreciation
|
(515.4
|
)
|
|
(475.2
|
)
|
Total property, plant and equipment, net
|
$
|
309.2
|
|
|
$
|
279.4
|
|
6. GOODWILL AND INTANGIBLE ASSETS
The Company tests its goodwill and non-amortizing trademarks for impairment annually as of the first day of its fourth fiscal quarter and in interim periods if certain events occur indicating the carrying value of goodwill or non-amortizing trademarks may be impaired. There were no indicators of impairment noted during the
nine months ended
June 28, 2013
.
Intangible assets consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
Weighted
Average
Amortization
Period Remaining (Years)
|
June 28, 2013
|
|
September 28, 2012
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer relationships
|
2.9
|
$
|
78.7
|
|
|
$
|
(46.0
|
)
|
|
$
|
32.7
|
|
|
$
|
78.7
|
|
|
$
|
(36.3
|
)
|
|
$
|
42.4
|
|
Developed technology and other
|
3.1
|
88.8
|
|
|
(52.2
|
)
|
|
36.6
|
|
|
89.3
|
|
|
(42.2
|
)
|
|
47.1
|
|
In-process research and development
|
0.7
|
6.1
|
|
|
(5.5
|
)
|
|
0.6
|
|
|
6.1
|
|
|
(3.2
|
)
|
|
2.9
|
|
Trademarks
|
Indefinite
|
1.6
|
|
|
—
|
|
|
1.6
|
|
|
1.6
|
|
|
—
|
|
|
1.6
|
|
Total intangible assets
|
|
$
|
175.2
|
|
|
$
|
(103.7
|
)
|
|
$
|
71.5
|
|
|
$
|
175.7
|
|
|
$
|
(81.7
|
)
|
|
$
|
94.0
|
|
Annual amortization expense for the next five years related to intangible assets is expected to be as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining 2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
Thereafter
|
Amortization expense
|
$
|
6.7
|
|
|
$
|
24.0
|
|
|
$
|
21.0
|
|
|
$
|
16.2
|
|
|
$
|
2.0
|
|
|
$
|
—
|
|
7. INCOME TAXES
Income tax provision consisted of the following components (in millions):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 28, 2013
|
|
June 29, 2012
|
|
June 28, 2013
|
|
June 29, 2012
|
United States income taxes
|
$
|
16.2
|
|
|
$
|
12.4
|
|
|
$
|
37.9
|
|
|
$
|
36.2
|
|
Foreign income taxes
|
2.6
|
|
|
0.4
|
|
|
6.9
|
|
|
3.5
|
|
Provision for income taxes
|
$
|
18.8
|
|
|
$
|
12.8
|
|
|
$
|
44.8
|
|
|
$
|
39.7
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
22.3
|
%
|
|
20.6
|
%
|
|
18.8
|
%
|
|
22.0
|
%
|
The difference between the Company's effective tax rate and the
35%
United States federal statutory rate for the
three and nine months ended
June 28, 2013
, resulted primarily from foreign earnings taxed at rates lower than the federal statutory rate, the domestic production activities deduction, and research and development tax credits earned, partially offset by an increase in the Company's tax expense related to a change in the Company's reserve for uncertain tax positions. In January 2013, the United States Congress enacted the American Taxpayer Relief Act of 2012, extending numerous tax provisions which had expired. The impact of this legislation reduced the Company's tax expense for the three and nine months ended
June 28, 2013
by
$6.1 million
and
$15.1 million
, respectively.
The difference between the Company's effective tax rate and the
35%
United States federal statutory rate for the
three and nine months ended
June 29, 2012
, resulted primarily from foreign earnings taxed at rates lower than the federal statutory rate, the domestic production activities deduction, and the recognition of research and development tax credits earned, partially offset by an increase in the Company's tax expense related to a change in the Company's reserve for uncertain tax positions.
8. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, various lawsuits, claims and proceedings have been, and may in the future be, instituted or asserted against the Company, including those pertaining to patent infringement, intellectual property, environmental, product liability and warranty, safety and health, employment and contractual matters. Legal costs are expensed as incurred.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted and may in the future assert patent, copyright, trademark and other intellectual property rights to technologies that are important to the Company's business and have demanded and may in the future demand that the Company license their technology. The outcome of any such litigation cannot be predicted with certainty and some such lawsuits, claims or proceedings may be disposed of unfavorably to the Company. Generally speaking, intellectual property disputes have a risk of injunctive relief, which, if imposed against the Company, could materially and adversely affect the Company's financial condition, or results of operations.
On June 6 and 7, 2011, two putative stockholder class action lawsuits (Case No. 111CV202403 (the “Bushansky action”) and Case No. 111CV202501 (the “Venette action”), respectively) were filed in California Superior Court in Santa Clara County naming Advanced Analogic Technologies Inc. ("AATI"), members of AATI's board of directors, the Company and PowerCo Acquisition Corp. (“Merger Sub”) as defendants. The lawsuits related to conduct surrounding the Company's acquisition of AATI. On July 26, 2011, the Court issued an order consolidating the Bushansky action and Venette action into a single, consolidated action captioned In re Advanced Analogic Technologies Inc. Shareholder Litigation, Lead Case No. 111CV202403, and designating an amended complaint filed on July 14, 2011 in the Venette action as the operative complaint in the litigation.
On November 30, 2011, following confidential arbitration proceedings in the Delaware Court of Chancery, the Company announced that it and AATI had amended their previously announced merger agreement whereby the Company would acquire AATI at a reduced price through a tender offer. The Company and AATI completed the transaction on January 9, 2012. On March 2, 2012, the Court stayed all discovery in the matter and ordered the plaintiffs to file an amended complaint by April 20, 2012.
On April 20, 2012, the plaintiffs filed an amended complaint (“First Amended Complaint”) against each of the original defendants with the exception of Merger Sub. The First Amended Complaint alleges, among other things, that (1) members of AATI's board of directors breached their fiduciary duties by (a) failing to take steps to maximize the value of AATI to its public shareholders by failing to adequately consider potential acquirers, (b) agreeing to the merger for inadequate consideration on unfair terms; (c)
causing the filing of a materially misleading Schedule 14D-9 that failed to (i) disclose a basis for the price reduction, (ii) describe the arbitration proceedings, and (iii) include any financial valuation or fairness opinion concerning whether the revised merger consideration was fair; and (d) causing the issuance of amendments to the Schedule 14D-9 that failed to respond adequately to the SEC's disclosure directives; and (2) Skyworks and AATI allegedly aided and abetted these purported breaches of fiduciary duties. On March 4, 2013, the plaintiffs filed a Second Amended Complaint, which asserts claims substantially similar to those in the First Amended Complaint. On April 5, 2013, the defendants filed demurrers against the Second Amended Complaint, calling for the case to be dismissed with prejudice. A hearing on the pending demurrers has been set for August 2, 2013.
The Company monitors the status of the foregoing litigation and other contingencies on an ongoing basis to ensure that appropriate amounts are recognized and/or disclosed in our financial statements and footnotes as and when required. At June 28, 2013 and at the time of this filing, the Company had not recorded any accrual for loss contingencies associated with its legal proceedings as losses resulting from such matters were determined to be remote. In addition, the Company does not believe there are any legal proceedings that are reasonably possible to result in a material loss. We are engaged in various other legal actions, not described above, in the normal course of business and, while there can be no assurances, the Company believes the outcome of all pending litigation involving the Company will not have, individually or in the aggregate, a material adverse effect on the Company.
Guarantees and Indemnifications
The Company has made no contractual guarantees for the benefit of third parties. However, the Company generally indemnifies its customers from third-party intellectual property infringement litigation claims that may be brought against its customers resulting from or related to the use of the Company's products, and, on occasion, also provides other indemnities related to product sales. In connection with certain facility leases, the Company has indemnified its lessors for certain claims arising from the Company's activities at the facility or out of the lease. The indemnities to customers in connection with product sales generally are subject to limits based upon the amount of the related product sales and in many cases are subject to geographic and other restrictions. However, in certain instances, the Company's indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make.
In addition, the Company indemnifies its directors and officers to the maximum extent permitted under the laws of the state of Delaware. The duration of the indemnities varies, and in many cases are indefinite.
As of
June 28, 2013
, the Company had not recorded any liability for any of the foregoing indemnities in the accompanying consolidated balance sheets. The Company continues to monitor the indemnities it provides and reassess whether it needs to record contingent liabilities during each reporting period.
9. COMMON STOCK REPURCHASE
On November 8, 2012, the Board of Directors of the Company authorized the repurchase of up to
$200.0 million
of the Company's common stock from time to time on the open market or in privately negotiated transactions, as permitted by securities laws and other legal requirements. During the three months ended
June 28, 2013
, the Company paid
$92.0 million
(including commissions) in connection with the repurchase of
4.0 million
shares of its common stock (paying an average price of
$22.99
per share). During the
nine months ended
June 28, 2013
, the Company paid
$164.5 million
(including commissions) in connection with the repurchase of
7.3 million
shares of its common stock (paying an average price of
$22.50
per share).
On July 16, 2013, the Board of Directors authorized the repurchase of up to
$250.0 million
of the Company's common stock from time to time prior to July 16, 2015 on the open market or in privately negotiated transactions, in compliance with applicable securities laws and other legal requirements. This newly authorized stock repurchase program replaces in its entirety the November 8, 2012 stock repurchase program.
10. EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 28, 2013
|
|
June 29, 2012
|
|
June 28, 2013
|
|
June 29, 2012
|
Net income
|
$
|
65.7
|
|
|
$
|
49.3
|
|
|
$
|
193.9
|
|
|
$
|
140.5
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
186.6
|
|
|
186.3
|
|
|
188.2
|
|
|
185.1
|
|
Dilutive effect of equity based awards
|
4.6
|
|
|
6.2
|
|
|
4.6
|
|
|
5.5
|
|
Dilutive effect of convertible debt
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
Weighted average shares outstanding – diluted
|
191.2
|
|
|
192.5
|
|
|
192.8
|
|
|
191.1
|
|
|
|
|
|
|
|
|
|
Net income per share – basic
|
$
|
0.35
|
|
|
$
|
0.26
|
|
|
$
|
1.03
|
|
|
$
|
0.76
|
|
Net income per share - diluted
|
$
|
0.34
|
|
|
$
|
0.26
|
|
|
$
|
1.01
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common stock equivalents
|
6.0
|
|
|
3.5
|
|
|
6.2
|
|
|
4.9
|
|
Basic earnings per share are calculated by dividing net income by the weighted average number of shares of the Company's common stock outstanding. The calculation of diluted earnings per share includes the dilutive effect of equity based awards and the convertible debt which was outstanding during the nine months ended June 29, 2012, using the treasury stock method. Certain of the Company's outstanding stock options, noted in the table above, were excluded because they were anti-dilutive, but could become dilutive in the future.
11. RESTRUCTURING AND OTHER CHARGES
During the nine months ended
June 28, 2013
, the Company recorded restructuring and other charges of approximately
$6.4 million
related to severance costs associated with two separate organizational restructuring plans undertaken to reduce headcount that were each initiated during the nine months ended June 28, 2013. These restructuring plans are expected to be completed within a year of the start of each program and have been aggregated into the "FY13 Restructuring Programs" line item in the summary table below. The Company does not anticipate any material charges in any future periods related to these plans.
During the three and nine months ended June 29, 2012, the Company recorded restructuring and other charges of approximately
$1.1 million
and
$7.8 million
, respectively. The charges for the nine months ended June 29, 2012 included
$7.2 million
in severance costs and
$0.6 million
in lease termination costs primarily related to an acquisition in fiscal 2012. Payments related to these restructuring plans are largely complete and are summarized under "Other Restructuring" in the table below.
The following tables present a summary of the Company's restructuring activity (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 28, 2013
|
|
Balance at March 29, 2013
|
|
Current Charges
|
|
Cash Payments
|
|
Other
|
|
Balance at June 28, 2013
|
FY13 Restructuring Programs
|
|
|
|
|
|
|
|
|
|
|
Employee severance costs
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
$
|
(1.9
|
)
|
|
$
|
—
|
|
|
$
|
1.1
|
|
Other Restructuring
|
|
|
|
|
|
|
|
|
|
|
Employee severance costs
|
|
0.1
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
Lease and other contractual obligations
|
|
0.6
|
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
0.4
|
|
Total
|
|
$
|
3.7
|
|
|
$
|
—
|
|
|
$
|
(2.2
|
)
|
|
$
|
—
|
|
|
$
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 28, 2013
|
|
Balance at September 28, 2012
|
|
Current Charges
|
|
Cash Payments
|
|
Other
|
|
Balance at June 28, 2013
|
FY13 Restructuring Programs
|
|
|
|
|
|
|
|
|
|
|
Employee severance costs
|
|
$
|
—
|
|
|
$
|
6.4
|
|
|
$
|
(5.3
|
)
|
|
$
|
—
|
|
|
$
|
1.1
|
|
Other Restructuring
|
|
|
|
|
|
|
|
|
|
|
Employee severance costs
|
|
0.9
|
|
|
—
|
|
|
(0.9
|
)
|
|
—
|
|
|
—
|
|
Lease and other contractual obligations
|
|
0.8
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
0.4
|
|
Total
|
|
$
|
1.7
|
|
|
$
|
6.4
|
|
|
$
|
(6.6
|
)
|
|
$
|
—
|
|
|
$
|
1.5
|
|