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| SWKS > SEC Filings for SWKS > Form 10-Q on 11-Feb-2009 | All Recent SEC Filings |
11-Feb-2009
Quarterly Report
RESULTS OF OPERATIONS
THREE-MONTHS ENDED JANUARY 2, 2009 AND DECEMBER 28, 2007
The following table sets forth the results of our operations expressed as a
percentage of net revenues for the three-month periods ended January 2, 2009 and
December 28, 2007:
Three-months Ended
January 2, December 28,
2009 2007
Net revenues 100.0 % 100.0 %
Cost of goods sold 60.1 60.9
Gross profit 39.9 39.1
Operating expenses:
Research and development 16.5 16.2
Selling, general and administrative 12.9 12.0
Amortization of intangible assets 0.5 0.9
Total operating expenses 29.9 29.1
Operating income 10.0 10.0
Interest expense (0.5 ) (1.0 )
Gain on early retirement of convertible debt 1.0 0.0
Other income, net 0.6 0.9
Income before income taxes 11.1 9.9
Provision for income taxes 0.6 0.8
Net income 10.5 % 9.1 %
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GENERAL
During the three-month period ended January 2, 2009, our financial performance
resulted in the following:
§ We generated $74.9 million in cash from operations in the three-month period
ended January 2, 2009, an increase of $19.4 million from the comparable
three-month period ended December 28, 2007. At January 2, 2009, we had
$249.7 million in cash, cash equivalents and restricted cash.
§ In the three-month period ended January 2, 2009, we retired $40.5 million of our 2007 Convertible Notes (due in 2012) at an average price of 92.6 percent of par value. These retirements reduced the remaining principal balance on our 2007 Convertible Notes to $97.1 million and reduced related potential dilution of stockholder ownership by approximately 4.2 million shares.
§ We increased gross profit by $1.5 million in the three-month period ended January 2, 2009, as compared to the first fiscal quarter of 2008, reflecting a gross profit margin of 39.9%, principally the result of a more favorable revenue mix, higher equipment efficiencies at our factories, progress on yield improvement initiatives, and material cost reductions, despite of relatively unchanged net revenues.
NET REVENUES
Three-months Ended
January 2, December 28,
(dollars in thousands) 2009 Change 2007
Net revenues $ 210,228 (0.1 )% $ 210,533
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We market and sell our mobile platforms and linear products to top tier Original Equipment Manufacturers ("OEMs") of communication electronic products, third-party Original Design Manufacturers ("ODMs") and contract manufacturers, and indirectly through electronic components distributors. We periodically enter into strategic arrangements that leverage our broad intellectual property portfolio by licensing or selling our patents or other intellectual property. We anticipate continuing this intellectual property strategy in future periods. Net revenues remained relatively unchanged for the first fiscal quarter of 2009, as compared to the first fiscal quarter of 2008. Net revenues from our top three customers decreased to 41.5% in the first quarter of fiscal 2009 from 47.2% in the first quarter of fiscal 2008, reflecting continued expansion of our customer base and the successful execution of our diversification strategy.
GROSS PROFIT
Three-months Ended
January 2, December 28,
(dollars in thousands) 2009 Change 2007
Gross profit $ 83,867 1.9 % $ 82,338
% of net revenues 39.9 % 39.1 %
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Gross profit represents net revenues less cost of goods sold. Cost of goods sold consists primarily of purchased materials, labor and overhead (including depreciation and equity based compensation expense) associated with product manufacturing.
The increase in gross profit as a percentage of revenue and in aggregate dollars
for the three-month period ended January 2, 2009, as compared to the
corresponding period in the previous fiscal year, was principally attributable
to increased labor and benefit costs as we continued to invest in what we
believe might be growth areas.
RESEARCH AND DEVELOPMENT
Three-months Ended
January 2, December 28,
(dollars in thousands) 2009 Change 2007
Research and development $ 34,644 1.6 % $ 34,094
% of net revenues 16.5 % 16.2 %
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Research and development expenses consist principally of direct personnel costs,
costs for pre-production evaluation and testing of new devices, masks and elots,
equity based compensation expense and design and test tool costs.
The increase in research and development expenses in aggregate dollars and as a
percentage of net revenues for the three-month period ended January 2, 2009 as
compared to the corresponding period in the previous fiscal year was principally
attributable to increased labor and benefit costs as we continued to invest in
what we believe to be growth areas.
SELLING, GENERAL AND ADMINISTRATIVE
Three-months Ended
January 2, December 28,
(dollars in thousands) 2009 Change 2007
Selling, general and administrative $ 27,101 7.2 % $ 25,287
% of net revenues 12.9 % 12.0 %
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Selling, general and administrative expenses include legal, accounting,
treasury, human resources, information systems, customer service, bad debt
expense, sales representative commissions, advertising, marketing and other
costs.
Selling, general and administrative expenses increased in aggregate dollars and
as a percentage of revenue for the three-month period ended January 2, 2009, as
compared to the corresponding period in fiscal year 2008, primarily due to
higher share-based compensation expense and sales commissions.
AMORTIZATION OF INTANGIBLE ASSETS
Three-months Ended
January 2, December 28,
(dollars in thousands) 2009 Change 2007
Amortization $ 1,149 (40.5 )% $ 1,932
% of net revenues 0.5 % 0.9 %
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The decrease in amortization expense during the three-month period ended
January 2, 2009, as compared to the corresponding period of fiscal 2008, was due
to a reduction in amortization of intangible assets associated with an
acquisition completed in October 2007. See Note 2 of Notes to Unaudited Interim
Consolidated Financial Statements for additional information
INTEREST EXPENSE
Three-months Ended
January 2, December 28,
(dollars in thousands) 2009 Change 2007
Interest expense $ 1,139 (48.4 )% $ 2,208
% of net revenues 0.5 % 1.0 %
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Interest expense is comprised principally of payments in connection with the
$50.0 million credit facility between Skyworks USA, Inc., our wholly owned
subsidiary, and Wachovia Bank, N.A. ("Facility Agreement"), the Company's 4.75%
convertible subordinated notes (the "Junior Notes"), and the Company's 1.25% and
1.50% convertible subordinated notes (the "2007 Convertible Notes").
The decrease in interest expense, both in aggregate dollars and as a percentage
of net revenues for the three-month period ended January 2, 2009, when compared
to the corresponding periods in fiscal 2008, was due to the retirement of our
higher interest rate Junior Notes, and the early retirement of $62.4 million and
$40.5 million of the 2007 Convertible Notes in the fourth quarter of fiscal 2008
and the first quarter of fiscal 2009, respectively. See Note 8 of Notes to
Unaudited Interim Consolidated Financial Statements for information related to
our borrowing arrangements.
GAIN ON EARLY RETIREMENT OF CONVERTIBLE DEBT
Three-months Ended
January 2, December 28,
(dollars in thousands) 2009 Change 2007
Gain on early retirement of convertible debt $ 2,035 100.0 % $ 0.0
% of net revenues 1.0 % 0.0 %
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In the three-month period ended January 2, 2009, we retired $40.5 million of our 2007 Convertible Notes due in 2012. We recorded income of $2.0 million in the first quarter of fiscal 2009 related to the early retirement of these notes, reflecting a $2.9 million discount received on the early retirement of the debt offset by a $0.9 million write-off of deferred financing costs.
OTHER INCOME, NET
Three-months Ended
January 2, December 28,
(dollars in thousands) 2009 Change 2007
Other income, net $ 1,402 (31.6 )% $ 2,050
% of net revenues 0.6 % 0.9 %
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Other income, net is comprised primarily of interest income on invested cash
balances, other non-operating income and expense items and foreign exchange
gains/losses.
The decreases in other income in both aggregate dollars and as a percentage of
net revenues for the three-month period ended January 2, 2009, as compared to
the corresponding period in fiscal 2008, is due to an overall decline in
interest income on invested cash balances due to lower interest rates in fiscal
2009.
PROVISION FOR INCOME TAXES
Three-months Ended
January 2, December 28,
(dollars in thousands) 2009 Change 2007
Provision for income taxes $ 1,247 (30.3 )% $ 1,789
% of net revenues 0.6 % 0.8 %
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The provision for income taxes for the three-month periods ended January 2, 2009
and December 28, 2007 consists of approximately $0.9 million and $1.9 million,
respectively, of United States income taxes. Of the total United States income
tax provision, $0.0 million and $1.5 million were recorded as a charge reducing
the carrying value of goodwill for the three-month periods ended January 2, 2009
and December 28, 2007, respectively.
The provision for the three-month periods ended January 2, 2009 and December 28,
2007 consists of approximately $0.3 million and $(0.1) million, respectively, of
foreign income taxes incurred by foreign operations.
In accordance with SFAS 109, Accounting for Income Taxes, management has
determined that it is more likely than not that a portion of our historic and
current year income tax benefits will not be realized. Accordingly, as of
January 2, 2009, we have established a valuation allowance of $75.4 million
related to our United States deferred tax assets. Deferred tax assets have been
recognized for foreign operations when management believes that it is more
likely than not that they will be recovered during the carryforward period.
There is a valuation allowance of $1.3 million related to our foreign deferred
tax assets.
Realization of benefits from our deferred tax asset (principally research and
experimentation credits) is dependent upon generating United States source
taxable income in the future, which may result in the existing valuation reserve
being reversed in the near term to the extent that the related deferred tax
assets no longer require a valuation allowance under the provisions of SFAS 109.
The Company will continue to evaluate its valuation allowance in future periods
and depending upon the outcome of that assessment, additional amounts could be
reversed or recorded and recognized as a reduction to goodwill or an adjustment
to income tax benefit or expense. Such adjustments could cause our effective
income tax rate to vary in future periods. We will need to generate $300.3
million of future United States federal taxable income to utilize all of our net
operating loss carryforwards, research and experimentation tax credit
carryforwards, and deferred income tax temporary differences as of January 2,
2009.
As noted in our Annual Report on Form 10-K, no benefit has been recognized for
certain acquisition related deferred tax assets. The benefit from the
recognition of these deferred items reduces the carrying value of goodwill
instead of reducing income tax expense. We will evaluate the realization of the
acquisition related deferred tax assets on a quarterly basis and adjust the
provision for income taxes accordingly. As a result, the effective tax rate may
vary in subsequent quarters.
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement No. 109, as of the beginning of
fiscal year 2008. During the quarter ended January 2, 2009, there were no
significant changes in the Company's gross unrecognized tax benefits. Of the
total unrecognized tax benefits at January 2, 2009, $0.6 million would impact
the effective tax rate, if recognized. There are no positions which we
anticipate could change within the next twelve months. Total year to date
accrued interest related to the Company's unrecognized tax benefits is
$0.0 million. The Company's policy is to recognize accrued interest and
penalties, if incurred, on any unrecognized tax benefits as a component of
income tax expense.
The Company's major tax jurisdictions as of the adoption of FIN 48 are the
United States, California, and Iowa. For United States federal income tax, the
statute of limitations is closed on years before fiscal 2005, but because of
carryforwards, certain items are open back to fiscal 1998. For California, the
statue of limitations is closed on years before fiscal 2004, but because of
carryforwards, certain items are open back to fiscal 2002. For Iowa, the statue
of limitations is closed on years before fiscal 2005, but because of
carryforwards, certain items are open back to fiscal year 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash Provided and Used
Three-months Ended
January 2, December 28,
(dollars in thousands) 2009 2007
Cash and cash equivalents at beginning of period $ 225,104 $ 241,577
Net cash provided by operating activities 74,934 55,494
Net cash used in investing activities (14,200 ) (50,020 )
Net cash used in financing activities (42,143 ) (48,337 )
Cash and cash equivalents at end of period $ 243,695 $ 198,714
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Based on our results of operations for fiscal 2008 and the first three months of
fiscal 2009, along with current trends, we expect our existing sources of
liquidity, together with cash expected to be generated from operations, will be
sufficient to fund our research and development, capital expenditures, debt
obligations, working capital and other cash requirements for at least the next
12 months. However, we cannot be certain that the capital required to fund these
expenses will be available in the future. In addition, any strategic investments
and acquisitions that we may make to help us grow our business may require
additional capital resources. If we are unable to obtain sufficient capital to
meet our capital needs on a timely basis and on favorable terms (if at all), our
business and operations could be materially adversely affected.
Cash and cash equivalent balances increased $18.6 million to $243.7 million at
January 2, 2009 from $225.1 million at October 3, 2008. We generated
$74.9 million in cash from operations during the three-month period ended
January 2, 2009, which was offset by the retirement of $40.5 million of the 2007
Convertible Notes and capital expenditures of $13.0 million. The number of days
sales outstanding for the three-month period ended January 2, 2009 decreased to
47 from 72 for the corresponding period in fiscal 2008.
During the three-month period ended January 2, 2009, we generated net income of
$22.0 million. We experienced a decrease in receivables, inventories, and other
assets of $37.8 million, $5.4 million, and $1.5 million, respectively. We also
incurred multiple non-cash charges (e.g., depreciation, amortization,
contribution of common shares to savings and retirement plans, and share-based
compensation expense) totaling $20.4 million. This was offset by a decrease in
accounts payable and other accrued liabilities of $5.9 million and $6.3 million,
respectively.
Cash used in investing activities for the three-month period ended January 2,
2009 consisted of investments in capital equipment of $13.0 million primarily to
expand fabrication and assembly and test capacity. We believe a focused program
of capital expenditures will be required to sustain our current manufacturing
capabilities. We expect that future capital expenditures will be funded by the
generation of positive cash flows from operations. We may also consider future
acquisition opportunities to extend our technology portfolio and design
expertise and to expand our product offerings.
Cash used in financing activities for the three-month period ended January 2,
2009 consisted of the retirement of $40.5 million of our 2007 Convertible Notes,
and the repurchase of treasury stock of $1.8 million, offset by cash provided by
stock option exercises of $0.2 million.
Our invested cash balances primarily consist of United States treasury
obligations, United States agency obligations, overnight repurchase agreements
backed by United States treasuries or United States agency obligations, highly
rated commercial paper and certificates of deposit. At January 2, 2009, we also
held a $3.2 million auction rate security which historically has provided
liquidity through a Dutch auction process. The recent disruptions in the credit
markets have substantially eliminated the liquidity of this process resulting in
failed auctions. During the fiscal year ended October 3, 2008, we performed a
comprehensive valuation and discounted cash flow analysis on the auction rate
security. We concluded the value of the auction rate security was $2.3 million,
and the carrying value of these securities was reduced by $0.9 million,
reflecting this change in fair value. Accordingly, in the fiscal year ended
October 3, 2008, we recorded unrealized losses on this auction rate security of
approximately $0.9 million. We assessed these declines in fair market value to
be temporary and consider the security to be illiquid until there is a
successful auction. Accordingly, the remaining auction rate security balance has
been reclassified to non-current other assets and the loss was recorded in Other
Comprehensive Income. As of January 2, 2009, we re-evaluated our auction rate
securities and determined that no adjustment was required. We will continue to
monitor the liquidity and accounting classification of this security in future
periods. If in a future period, if we determine that the impairment is other
than temporary, we will impair the security to its fair value and charge the
loss to earnings.
On July 15, 2003, we entered into a receivables purchase agreement under which
we have agreed to sell from time to time certain of our accounts receivable to
Skyworks USA, Inc. ("Skyworks USA"), a wholly-owned special purpose entity that
is fully consolidated for accounting purposes. Concurrently, Skyworks USA
entered into an agreement with Wachovia Bank, N.A. providing for a $50.0 million
credit facility ("Facility Agreement'') secured by the purchased accounts
receivable. As a part of the consolidation, any interest incurred by Skyworks
USA related to monies it borrows under the Facility Agreement is recorded as
interest expense in the Company's results of operations. We perform collections
and administrative functions on behalf of Skyworks USA. Interest related to the
Facility Agreement is at LIBOR plus 0.75%. We renewed the Facility Agreement for
another year in July 2008, and as of January 2, 2009, Skyworks USA had borrowed
$50.0 million under this agreement.
CONTRACTUAL OBLIGATIONS
Our contractual obligations disclosure in our annual report on Form 10-K for the
year ended October 3, 2008 has not materially changed since we filed that
report, with the exception that we retired $40.5 million of our 2007 Convertible
Notes (due in 2012) at an average price of 92.6 of par value. These retirements
reduced the remaining principal balance on our 2007 Convertible Notes to $97.1
million as of November 12, 2008. Our short-term and long-term debt are more
fully described in Note 8 of this Form 10-Q.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS 141(R)
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations ("SFAS
141(R)"). SFAS 141(R) applies to any transaction or other event that meets the
definition of a business combination. Where applicable, SFAS 141(R) establishes
principles and requirements for how the acquirer recognizes and measures
identifiable assets acquired, liabilities assumed, noncontrolling interest in
the acquiree and goodwill or gain from a bargain purchase. In addition, SFAS
141(R) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. This statement is to be applied prospectively for fiscal years
beginning after December 15, 2008. The Company will evaluate the impact of SFAS
141(R) on its Consolidated Financial Statements in the event future business
combinations are contemplated.
SFAS 160
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51 ("SFAS 160"). SFAS
160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51's consolidation procedures for
consistency with the requirements of SFAS 141(R). This statement is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The statement shall be applied prospectively as of the
beginning of the fiscal year in which the statement is initially adopted. The
Company does not expect the adoption of SFAS 160 to impact its results of
operations or financial position because the Company does not have any minority
interests.
SFAS 161
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133 ("SFAS
161"). SFAS 161 amends FASB Statement No. 133 to require enhanced disclosures
. . .
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