Skyworks Solutions - 10-Q quarterly report FY

 

 

Registrant’s telephone number, including area code: (781) 376-3000

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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

SKYWORKS SOLUTIONS, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 28, 2007

TABLE OF CONTENTS

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

Skyworks Solutions, Inc. (“Skyworks” or the “Company”) designs, manufactures and markets a broad range of high performance analog and mixed signal semiconductors that enable wireless connectivity. Our power amplifiers (PAs), front-end modules (FEMs) and integrated radio frequency (RF) solutions can be found in many of the cellular handsets sold by the world’s leading manufacturers. Leveraging our core analog technologies, we also offer a diverse portfolio of linear integrated circuits (ICs) that support automotive, broadband, cellular infrastructure, industrial and medical applications.

The accompanying unaudited 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 necessary to present fairly the financial position, results of operations, and cash flows of the Company. The results of operations for the three-month period ended December 28, 2007 are not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s Form 10-K for the fiscal year ended September 28, 2007 as filed with the SEC.

The Company’s fiscal year ends on the Friday closest to September 30. Fiscal 2007 consisted of 52 weeks and ended on September 28, 2007, and the first quarters of fiscal 2008 and fiscal 2007 each consisted of 13 weeks and ended on December 28, 2007 and December 29, 2006, respectively. Fiscal 2008 will consist of 53 weeks and end on October 3, 2008, with the first three quarters of fiscal 2008 consisting of 13 weeks, and the fourth quarter of fiscal 2008 consisting of 14 weeks.

The Company accounts for comprehensive income (loss) in accordance with the provisions of SFAS No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”). SFAS No. 130 is a financial statement presentation standard that requires the Company to disclose non-owner changes included in equity but not included in net income or loss. Other items of comprehensive income (loss) presented in the financial statements consists of adjustments to the Company’s minimum pension liability as follows (in thousands):

The Company recorded an unrealized loss against its auction rate securities in the first quarter of fiscal 2008 and consistent with the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” accounted for the unrealized loss in Other Comprehensive Income (Loss).

In October 2007, the Company paid $32.6 million in cash to acquire certain assets from two separate companies. We acquired raw materials, die bank, finished goods, proprietary GaAs PA/FEM designs and related intellectual property in a business combination from Freescale Semiconductor. We also acquired sixteen fundamental HBT and RF MEMs patents in an asset acquisition from another company. The Company calculated the fair value of the tangible and intangible assets acquired to allocate the purchase prices in accordance with SFAS 141. Based upon those calculations, the Company has preliminarily concluded that customer relationships have a fair value of $8.5 million, order backlog has a fair value of $1.6 million and the patents have a fair value of $0.9 million. These

intangible assets will be amortized over 5, .5 and 3 years, respectively. The fair value of inventory acquired was approximately $5.6 million and the remaining purchase price, approximately $16 million, is allocated to goodwill. The Company will finalize the purchase accounting on the business combination in the second quarter of fiscal 2008.

The Company’s primary reasons for the above acquisitions were to expand its market share in power amplifiers and front end modules at certain existing customers, and increase the probability of future design wins with these customers. The significant factors that resulted in recognition of goodwill were: (a) the purchase price was based on cash flow projections assuming the sale of the acquired inventory and the sale of the Company’s next generation product (a derivative of the acquired inventory); and (b) there were very few tangible and identifiable intangible assets that qualified for recognition.

The Consolidated Financial Statements include the operating results of the acquired business from the date of acquisition. Pro forma results of operations for the acquisitions completed during the three-month period ended December 28, 2007 have not been presented because the effects of the acquisitions were not material to the Company’s financial results.

Marketable securities are categorized as available for sale and are summarized as follows as of December 28, 2007 (in thousands):

In the first quarter of fiscal 2008, the Company recorded an unrealized loss on its auction rate securities of approximately $0.7 million. The Company currently believes that these securities are only temporarily impaired and thus continue to classify them as short-term available for sale securities. The Company will monitor these securities in future periods and continue to periodically assess their classification.

Marketable securities are categorized as available for sale and are summarized as follows as of September 28, 2007 (in thousands):

Inventories consist of the following (in thousands):

Property, plant and equipment consist of the following (in thousands):

Goodwill and intangible assets consist of the following (in thousands):

The changes in the gross carrying amount of goodwill and intangible assets are as follows (in thousands):

In October 2007, the Company paid $32.6 million in cash to acquire certain assets from two separate companies resulting in the preliminary allocation of approximately $16.0 million to goodwill. For additional information regarding these acquisitions see Note 3 Business Combinations.

Goodwill was reduced by $1.5 million in the three-month period ended December 28, 2007 as a result of the realization of deferred tax assets. The benefit from the recognition of a portion of these deferred items reduces the carrying value of goodwill instead of reducing income tax expense. Accordingly, future realization of certain deferred tax assets will reduce the carrying value of goodwill. The remaining deferred tax assets that could reduce goodwill in future periods are $17.1 million as of December 28, 2007.

Annual amortization expense related to intangible assets for the next five years is expected to be as follows (in thousands):

     Long-term debt consists of the following (in thousands):

On March 2, 2007, the Company issued $200.0 million aggregate principal amount of convertible subordinated notes (“2007 Convertible Notes”). The offering contained two tranches. The first tranche consists of $100.0 million of 1.25% convertible subordinated notes due March 2010. The second tranche consists of $100.0 million of 1.50% convertible subordinated notes due March 2012. The conversion price of the 2007 Convertible Notes is 105.0696 shares per $1,000 principal amount of notes to be redeemed, which is the equivalent of a conversion price of approximately $9.52 per share, plus accrued and unpaid interest, if any, to the conversion date. Holders may require the Company to repurchase the 2007 Convertible Notes upon a change in control of the Company. The Company pays interest in cash semi-annually in arrears on March 1 and September 1 of each year. It has been the Company’s historical practice to cash settle the principal and interest components of convertible debt instruments, and it is our intention to continue to do so in the future, including settlement of the 2007 Convertible Notes.

On December 21, 2006, the Financial Acccounting Standards Board (“FASB”) issued FASB Staff Position Emerging Issues Task Force 00-19-2 (“FSP EITF 00-19-2”). FSP EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies (“FASB 5”). The Company adopted FSP EITF 00-19-2 on September 29, 2007. The Company agreed to file a shelf registration statement under the Securities Act not later than 120 days after the first date of original issuance of the 2007 Convertible Notes. The Company agreed to utilize commercially reasonable efforts to have this shelf registration statement declared effective not later than 180 days after the first date of original issuance of the notes, and to keep it effective until the earliest of: 1) two years from the effective date of the shelf

registration statement; 2) the date when all registrable securities have been registered under the Securities Act and disposed of; and 3) the date on which all registrable securities held by non-affiliates are eligible to be sold to the public pursuant to Rule 144(k) under the Securities Act. The Company filed the shelf registration statement within 120 days of the original issuance of the 2007 Convertible Notes and the shelf registration statement was declared effective within 180 days after the first date of original issuance of the notes. If the shelf registration statement ceases to be effective within two years from the effective date of the shelf registration statement the Company will be obligated to pay an additional 0.25% interest per annum for the first 90 days after the occurrence of the registration default and at the rate of 0.50% per annum thereafter. The Company has concluded that it is not probable that a contingent liability has been incurred as of December 28, 2007 pursuant to the application of FASB 5 and thus has not recorded a liability.

Junior Notes represent the Company’s 4.75% convertible subordinated notes due November 2007. During the three-month period ended December 28, 2007, the Company retired the entire $49.3 million in aggregate principal amount of the Junior Notes at a price of $1,000 per $1,000 principal amount of notes plus $1.2 million in accrued and unpaid interest.

Short-term debt consists of the following (in thousands):

On July 15, 2003, the Company entered into a receivables purchase agreement under which it has agreed to sell from time to time certain of its accounts receivable to Skyworks USA, Inc. (“Skyworks USA”), a wholly-owned special purpose entity that is 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. The Company performs collections and administrative functions on behalf of Skyworks USA. Interest related to the Facility Agreement is at LIBOR plus 0.4%. As of December 28, 2007, Skyworks USA had borrowed $50.0 million under this agreement.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This statement also provides guidance on derecognition, classification, interest and penalties, accounting in the interim periods, disclosure, and transition. The Company adopted FIN 48 on September 29, 2007.

The Company had no cumulative effect of the change impacting retained earnings as a result of the adoption of FIN 48. The Company also recognized a $5.9 million decrease to deferred tax assets; however, due to a valuation allowance against the Company’s United States deferred taxes, there was no retained earnings impact. As of the date of adoption, the Company’s gross unrecognized tax benefits totaled $7.3 million. There were no significant changes in the Company’s gross unrecognized tax benefits during the three-month period ended December 28, 2007. Of the total unrecognized tax benefits at the date of adoption and December 28, 2007, $0.6 million and $0.6 million, respectively, would impact the effective tax rate, if recognized. The remaining unrecognized tax benefits would not impact the effective tax rate, if recognized, as the company has a valuation allowance against its United States deferred taxes.

Included in the balance of unrecognized tax benefits at the date of adoption is $0.6 million related to tax positions for which it is reasonably possible that the total amounts could significantly change in the next twelve months. This represents a possible decrease in unrecognized tax benefits related to the expiration of a statute of limitations period.

The Company’s major tax jurisdictions as of the adoption of FIN 48 are the United States, California, and Iowa. For the United States, the Company has open tax years dating back to fiscal year 1998 due to the carryforward of tax attributes. For California, the Company has open tax years dating back to fiscal year 2002 due to the carryforward of tax attributes. For Iowa, the Company has open tax years dating back to fiscal year 2002 due to the carryforward of tax attributes.

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. As of the date of adoption of FIN 48, the Company had $0.4 million of accrued interest and no accrued penalties associated with any unrecognized tax benefits. There was no significant change in the Company’s accrued interest and penalties on unrecognized tax benefits during the three-month period ended December 28, 2007. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

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, safety and health, employment and contractual matters.

Additionally, the semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted and may in the future assert patent, copyright, trademark and other intellectual property rights to technologies that are important to our business and have demanded and may in the future demand that we license their technology. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company. Intellectual property disputes often have a risk of injunctive relief, which, if imposed against the Company, could materially and adversely affect the Company’s financial condition, or results of operations.

From time to time we are involved in legal proceedings in the ordinary course of business. We believe that there is no such ordinary course litigation pending that will have, individually or in the aggregate, a material adverse effect on our business.

The Company does not currently have any guarantees. The Company generally indemnifies its customers from third-party intellectual property infringement litigation claims related to its products, and, on occasion, also provides other indemnities related to product sales. In connection with certain facility leases, the Company has indemnified its lessors for certain claims arising from the facility or the lease.

The Company indemnifies its directors and officers to the maximum extent permitted under the laws of the state of Delaware. The duration of the indemnities varies, and in many cases is indefinite. The indemnities to customers in connection with product sales generally are subject to limits based upon the amount of the related product sales and in many cases are subject to geographic and other restrictions. In certain instances, the Company’s indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities in the accompanying consolidated balance sheets.

Restructuring and special charges consists of the following (in thousands):

Restructuring and special charges consist of charges for asset impairments and restructuring activities, as follows:

On September 29, 2006, the Company implemented a plan to exit its baseband product area in order to focus on its core products encompassing linear products, power amplifiers, front-end modules and radio solutions. The Company recorded various charges associated with this action.

Activity and liability balances related to the fiscal 2006 restructuring actions are as follows (in thousands):

The Company anticipates that most of the remaining payments associated with the exit of the baseband product area will be remitted during fiscal years 2008 and 2009.

The Company follows SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and in interim reports to shareholders. The method for determining what information to report is based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance. In evaluating financial performance, management uses sales and operating profit as the measure of the segments’ profit or loss. Based on the guidance in SFAS No. 131, the Company has one operating segment for financial reporting purposes, which designs, develops, manufactures and markets proprietary semiconductor products, including intellectual property, for manufacturers of wireless communication products.

Net income for the three-month period ending December 28, 2007 and December 29, 2006 included share-based compensation expense under SFAS 123(R) of $5.0 million and $2.0 million, respectively. Share-based compensation expense for the three-month period ended December 28, 2007 included $2.3 million on employee stock options, $1.6 million on non-vested restricted stock with service and market conditions, $0.3 million on non-vested restricted stock with service conditions, $0.4 million on performance shares, and $0.4 million on the Employee Stock Purchase Plan (“ESPP”). Share-based compensation expense for the three-month period ended December 29, 2006 included $0.8 million on employee stock options, $0.6 million on non-vested restricted stock with service and market conditions, $0.3 million on non-vested restricted stock with service conditions and $0.3 million on the ESPP.

The following table illustrates the grant dilution and exercise dilution:
 

During the three-month period ended December 28, 2007, the dilutive effect of in-the-money equity-based awards was approximately 2.5 million shares or 1.5% of the basic shares outstanding based on the Company’s average share price of $8.81.   

The following table summarizes share-based compensation expense related to employee stock options, employee stock purchases, and restricted stock grants under SFAS 123(R) for the three-month periods ended December 28, 2007 and December 29, 2006 which was allocated as follows:

As of December 28, 2007 and December 29, 2006, the Company had capitalized share-based compensation expense of $0.4 million and $0.1 million in inventory. The Company did not recognize any tax benefit on the share-based compensation recorded in the three-month periods ended December 28, 2007 and December 29, 2006 because we have established a valuation allowance against our net deferred tax assets.

The weighted-average estimated fair value of employee stock options granted during the three-month period ended December 28, 2007 and December 29, 2006 was $4.81 per share and $3.77 per share, respectively, using the Black Scholes option-pricing model with the following weighted-average assumptions:

The Company used an arithmetic average of historical volatility and implied volatility to calculate its expected volatility at November 6, 2007. Historical volatility was determined by calculating the mean reversion of the daily-adjusted closing stock price over the approximate 5.5 years between June 25, 2002 and November 6, 2007. The implied volatility was calculated by analyzing the 52-week minimum and maximum prices of publicly traded call options on the Company’s common stock. The Company concluded that an arithmetic average of these two calculations provided for the most reasonable estimate of expected volatility under the guidance of SFAS 123(R).   The risk-free interest rate assumption is based upon observed Treasury bill interest rates (risk free) appropriate for the term of the Company’s employee stock options.   The expected life of employee stock options represents a calculation based upon the historical exercise, cancellation and forfeiture experience for the Company over the approximate 5.5 years between June 25, 2002 and November 6, 2007. The Company determined that it had two populations with unique exercise behavior. These populations included stock options with a contractual life of 7 years and 10 years, respectively.

As share-based compensation expense recognized in the Consolidated Statement of Operations for the three-month period ended December 28, 2007 is actually based on awards ultimately expected to vest, it has been reduced for annualized estimated forfeitures of 11.79%. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share includes the dilutive effect of equity based awards using the treasury stock method, the Junior Notes on an if-converted basis and the 2007 Convertible Notes using the treasury stock method, if their effect is dilutive.

Junior Notes convertible into approximately 2.9 million shares and equity based awards exercisable for approximately 21.1 million shares were outstanding but not included in the computation of earnings per share for the three-month period ended December 28, 2007 as their effect would have been anti-dilutive. If the Company had earned in excess of $19.7 million in net income for the three-month period ended December 28, 2007, the Junior Notes would have been dilutive to earnings per share.

In addition, the Company issued $200.0 million aggregate principal amount of convertible subordinated notes (“2007 Convertible Notes”) in March 2007. These 2007 Convertible Notes contain cash settlement provisions, which permit the application of the treasury stock method in determining potential share dilution of the conversion spread should the share price of the Company’s common stock exceed $9.52. It has been the Company’s historical practice to cash settle the principal and interest components of convertible debt instruments, and it is our intention to continue to do so in the future, including settlement of the 2007 Convertible Notes issued in March 2007. These shares have not been included in the computation of earnings per share for the three-month period ended December 28, 2007 as their effect would have been anti-dilutive. The maximum potential dilution from the settlement of the 2007 Convertible Notes would be approximately 21.0 million shares.

Junior Notes convertible into approximately 19.8 million shares and equity based awards exercisable into approximately 21.5 million shares were outstanding but not included in the computation of earnings per share for the three-month period ended December 29, 2006 as their effect would have been anti-dilutive. If the Company had earned at least $19.5 million in net income for the three-month period ended December 29, 2006, the Junior Notes would have been dilutive to earnings per share.

The following table sets forth the results of our operations expressed as a percentage of net revenues for the three-month periods ended December 28, 2007 and December 29, 2006:

During the three-month period ended December 28, 2007, certain key factors contributed to our overall results of operations and cash flows from operations. More specifically:

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 leveraging 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 increased 7.4% or $14.5 million overall for the first fiscal quarter of 2008 as compared to the first fiscal quarter of 2007. Overall average selling prices declined by 4.5% in the first quarter of fiscal 2008 as compared to a decline of 8.3% in the corresponding period in the prior year. The slowing decline in average selling prices is due to the increasingly technologically complex content and design of our front end modules. Net revenues from our top three customers decreased to $99.4 million or 47.2% in the first quarter of fiscal 2008 from $106.6 million or 54.3% in the first quarter of fiscal 2007 reflecting an increasingly diversified customer profile and product portfolio.

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 and sustaining engineering expenses pertaining to products sold.

Gross profit in aggregate dollars and as a percentage of sales improved in the first quarter of fiscal 2008 as compared to the corresponding period in the prior year due to higher equipment efficiency and factory utilization, continued progress on yield improvement initiatives and double digit year-over year material cost reductions. More specifically, gross margin as a percentage of revenue increased to 39.1% from 38.4% for the quarter ended December 28, 2007 as compared to the three-month period ended December 29, 2006. Increasingly, our product portfolio is characterized by products with longer lifecycles and more complex, highly integrated technology which drives higher gross margins. Furthermore, our established hybrid manufacturing model with multiple external foundries allows us to maintain high internal capacity utilization by creating second-sources for high fixed cost services like foundry and assembly. This approach provides supply chain flexibility, lower capital investment and

the ability to meet upside demand and provides gross margin advantages. In the first quarter of both fiscal 2008 and 2007, we also benefited from higher contribution margins associated with the licensing and/or sale of intellectual property.

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.

The increase in research and development expenses in aggregate dollars and as a percentage of sales for the three-month period ended December 28, 2007 when compared to the corresponding period in the previous fiscal year is primarily the result of higher recruiting and relocation costs, higher variable materials and supplies expense and additional expense incurred for engineering lots and masks.

Selling, general and administrative expenses include personnel costs (legal, accounting, treasury, human resources, information systems, customer service, etc.), bad debt expense, sales representative commissions, advertising and other marketing costs.

Selling, general and administrative expenses increased in aggregate dollars for the three-month period ended December 28, 2007 when compared to the corresponding period in the previous fiscal year primarily as the result of higher professional services expenses and higher commissions expense on intellectual property sales. The decrease in selling, general and administrative expenses as a percentage of revenues is due to the higher level of revenues in 2008.

The increase in amortization expense during the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007 is due to the acquisitions completed in October 2007 and the associated amortizable customer relationships, patents and order backlog that was acquired.

In the first quarter of fiscal 2008, the base of our amortizable intangible assets increased by approximately $11.0 million due to acquired customer relationships, patents and order backlog.

In 2002, we recorded $36.4 million of intangible assets consisting of developed technology, customer relationships and a trademark acquired by the Company. These assets are principally being amortized on a straight-line basis over a 10-year period.

Restructuring and special charges consist of charges for asset impairments and restructuring activities, as follows:

On September 29, 2006, the Company exited its baseband product area in order to focus on its core business encompassing linear products, power amplifiers, front-end modules and radio solutions. The Company recorded various charges associated with this action.

For the three-month period ended December 29, 2006, we recorded an additional $1.4 million related to the write-down of technology licenses and design software, and $4.1 million related to lease obligations associated with the shut-down of certain locations associated with the baseband product area.

For additional information regarding restructuring charges and liability balances, see Note 12 of Notes to Interim Consolidated Financial Statements.

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 1.50% and 1.25% 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 December 28, 2007 when compared to the corresponding period in fiscal 2006, is due to the retirement of our higher interest rate Junior Notes replaced with the proceeds of the issuance of the substantially lower interest rate 2007 Convertible Notes in March 2007.

See Note 8 of Notes to Interim Consolidated Financial Statements for information related to our borrowing arrangements.

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.

In accordance with SFAS 109, “Accounting for Income Taxes”, we have 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 December 28, 2007, we have established a valuation allowance of $147.0 million related to our United States deferred tax assets. Deferred tax assets have been recognized for foreign operations when we believe that it is more likely than not that they will be recovered during the carryforward period.

The provision for income taxes for the three-month periods ended December 28, 2007 and December 29, 2006 consists of approximately $1.9 million and $1.5 million, respectively, of United States income taxes. Of the total United States income tax provision, $1.5 million and $1.3 million were recorded as a charge reducing the carrying value of goodwill for the three-month periods ended December 28, 2007 and December 29, 2006. As noted in our Annual Report on Form 10-K, no benefit has been recognized for certain 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 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.

In addition, the provision for the three-month periods ended December 28, 2007 and December 29, 2006, consists of approximately ($0.1) million and $0.2 million, respectively, of foreign income taxes incurred by foreign operations.

On October 1, 2007, Mexico enacted a new “flat tax” regime which will become effective January 1, 2008. SFAS 109, “Accounting for Income Taxes”, prescribes that the effect of the new tax on deferred taxes must be included in tax expense in the period that includes the enactment date. The effect of recording deferred taxes in the first fiscal quarter of 2008 to the foreign tax provision is a benefit of ($0.2) million.

For the three-month period ended December 28, 2007, United States income tax was provided on current earnings attributable to our Mexico operations. No provision has been made for United States federal, state, or additional foreign income taxes, which would be due upon the actual or deemed distribution of undistributed earnings of the other foreign subsidiaries, which have been or are, intended to be permanently reinvested. The effect on our financial statements is immaterial.

Realization of benefits from our net operating losses 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.

We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), as of the beginning of fiscal year 2008. We had no cumulative effect of the change impacting retained earnings as a result of the adoption of FIN 48. We also recognized a $5.9 million decrease to deferred tax assets; however, due to a valuation allowance against our United States deferred taxes, there was no retained earnings impact. As of the date of adoption, our gross unrecognized tax benefits totaled $7.3 million. There were no significant changes in our gross unrecognized tax benefits during the three-month period ended December 28, 2007. Of the total unrecognized tax benefits at the date of adoption and December 28, 2007, $0.6 million and $0.6 million, respectively, would impact the effective tax rate, if recognized. The remaining unrecognized tax benefits would not impact the effective tax rate, if recognized, as we have a valuation allowance against its United States deferred taxes.

Included in the balance of unrecognized tax benefits at the date of adoption is $0.6 million related to tax positions for which it is reasonably possible that the total amounts could significantly change in the next twelve months. This represents a possible decrease in unrecognized tax benefits related to the expiration of a statute of limitations period.

The Company’s major tax jurisdictions as of the adoption of FIN 48 are the United States, California, and Iowa. For the United States, we have open tax years dating back to fiscal year 1998 due to the carryforward of tax attributes. For California, we have open tax years dating back to fiscal year 2002 due to the carryforward of tax

attributes. For Iowa, we have open tax years dating back to fiscal year 2002 due to the carryforward of tax attributes.

Our policy is to recognize accrued interest and penalties, if incurred, on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, we had $0.4 million of accrued interest and no accrued penalties associated with any unrecognized tax benefits. There was no significant change in our accrued interest and penalties on unrecognized tax benefits during the three-month period ended December 28, 2007. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

Based on our results of operations for fiscal 2007 and the first quarter of fiscal 2008 along with current trends, we expect our existing sources of liquidity, together with cash expected to be generated from operations and short term investments, will allow us to sufficiently fund our research and development, capital expenditures, debt obligations, purchase obligations, working capital and other cash requirements for at least the next 12 months. However, we cannot assure you 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 enough capital to meet our capital needs on a timely basis or at all, our business and operations could be materially adversely affected.

Cash, cash equivalent balances and short-term investments decreased $46.3 million to $207.5 million at December 28, 2007 from $253.8 million at September 28, 2007. This overall decrease was the result of payments for acquisitions of $32.6 million and the retirement of the entire balance of the Junior Notes of $49.3 million offset by cash generated from operating activities of $55.5 million. The number of days sales outstanding for the three-months ended December 28, 2007 decreased to 72 from 76 for the corresponding period in the previous fiscal year. Annualized inventory turns for the three-months ended December 28, 2007 were 6.0 compared to 6.8 for the corresponding period in the previous fiscal year.

During the three-months ended December 28, 2007, we generated $55.5 million in cash from operating activities as we achieved net income of $19.1 million, experienced an increase in accounts payable balances of $12.8 million, a decrease in inventories of $1.6 million, a decrease in receivables of $0.7 million and a decrease in other assets of $1.3 million. We incurred multiple non-cash charges (e.g., depreciation, amortization, charge in lieu of income tax expense, contribution of common shares to savings and retirement plans and share-based compensation expense) totaling $20.6 million.

Cash used in investing activities for the three-months ended December 28, 2007, consisted of net sales of $2.5 million in auction rate securities and capital expenditures of $19.9 million primarily for fabrication and assembly and test capacity. In addition, we paid $32.6 million in cash to acquire certain assets from two separate companies. We acquired raw materials, die bank, finished goods, proprietary GaAs PA/FEM designs and related intellectual property in a business combination from Freescale Semiconductor. We also acquired sixteen fundamental HBT and RF MEMs patents from another company in an asset acquisition. We believe a focused program of capital expenditures will be required to sustain our current manufacturing capabilities. Future capital expenditures will be

funded by the generation of positive cash flows from operations. We may also consider additional 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-months ended December 28, 2007, consisted of the retirement of the remaining $49.3 million in Junior notes, repurchase of common stock of $1.3 million and cash provided by stock option exercises of $2.1 million.

In connection with our exit of the baseband product area, we anticipate making remaining cash payments of approximately $3.1 million in future periods. Certain payments on long-term lease obligations resulting from facility closures and severance payments will be remitted in fiscal 2008 and beyond. We expect our existing sources of liquidity, together with cash expected to be generated from operations and short-term investments, will be sufficient to fund these costs associated with the exit of our baseband product area.

Our invested cash balances primarily consist of highly rated commercial paper, United States treasury obligations, United States agency obligations, overnight repurchase agreements backed by United States treasuries or United States agency obligations, certificates of deposit and foreign bank obligations. At December 28, 2007, we also held a $3.2 million auction rate security. In the first quarter of fiscal 2008, we recorded an unrealized loss on our auction rate security of approximately $0.7 million. We believe that this security is currently only temporarily impaired and thus continue to classify it as a short-term available for sale security. We will monitor this security in future periods and continue to periodically assess its classification.

Our contractual obligations disclosure in our annual report on Form 10-K for the year ended September 28, 2007 has not materially changed since we filed that report, with the exception that we retired $49.3 million of Junior Notes on November 15, 2007. Our short-term and long-term debt are more fully described in Note 8 of this Form 10-Q.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company adopted FIN 48 during the quarter ended December 28, 2007 and its adoption did not materially impact its results from operations or financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company has not yet determined the impact that SFAS 157 will have on its results from operations or financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) including an amendment of SFAS No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for the Company beginning in fiscal 2009. The Company is currently evaluating SFAS 159 and the impact that it may have on results of operations or financial position.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) applies to any transaction or other event that meets the definition of a business combination. Where applicable, SFAS No. 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 is in the process of evaluating the impact of SFAS No. 141(R) on its Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, An Amendment of ARB No. 51. SFAS No. 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 FASB Statement No. 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 is currently evaluating SFAS 160 and the impact that it may have on results of operations or financial position.

We are subject to market risks, such as changes in foreign currency exchange rates and interest rates. Our financial instruments include cash and cash equivalents, short-term investments, short-term debt and long-term debt. Our main investment objective is the preservation of investment capital. Consequently, we invest with only high-credit-quality issuers and we limit the amount of our credit exposure to any one issuer. We do not use derivative instruments for speculative or investment purposes. There have been no material changes in market risk exposures from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 28, 2007.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 28, 2007. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 28, 2007, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the fiscal quarter ended December 28, 2007 that has materially affected, or is reasonably likely to materially affect, Skyworks’ internal control over financial reporting.

There have been no significant changes in the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended September 28, 2007.

(c)

The following table provides information regarding repurchases of common stock made by us during the fiscal quarter ended December 28, 2007:

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.