Skyworks Solutions - 10-Q quarterly report FY

 

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

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SKYWORKS SOLUTIONS, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 29, 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.

(In thousands, except per share amounts)

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

(Unaudited, in thousands)

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

Skyworks Solutions, Inc. (“Skyworks” or the “Company”) is an innovator of high performance analog and mixed signal semiconductors enabling mobile connectivity. The Company’s power amplifiers, front-end modules and direct conversion radios are at the heart of many of today’s leading-edge multimedia handsets. Leveraging core technologies, Skyworks also offers a diverse portfolio of linear products that support automotive, broadband, cellular infrastructure, industrial and medical applications.

Skyworks was formed through the merger (“Merger”) of the wireless business of Conexant Systems, Inc. (“Conexant”) and Alpha Industries, Inc. (“Alpha”) on June 25, 2002, pursuant to an Agreement and Plan of Reorganization, dated as of December 16, 2001, and amended as of April 12, 2002, by and among Alpha, Conexant and Washington Sub, Inc. (“Washington”), a wholly-owned subsidiary of Conexant to which Conexant spun off its wireless communications business. Pursuant to the Merger, Washington merged with and into Alpha, with Alpha as the surviving corporation. Immediately following the Merger, Alpha purchased Conexant’s semiconductor assembly and test facility located in Mexicali, Mexico and certain related operations (the “Mexicali Operations”). The Washington business and the Mexicali Operations are collectively referred to as “Washington/Mexicali.” Shortly thereafter, Alpha, which was incorporated in Delaware in 1962, changed its corporate name to Skyworks Solutions, Inc.

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 and nine-month periods ended June 29, 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 29, 2006 as filed with the SEC.

The Company’s fiscal year ends on the Friday closest to September 30. Fiscal 2006 consisted of 52 weeks and ended on September 29, 2006, and the third quarters of fiscal 2007 and fiscal 2006 ended on June 29, 2007 and June 30, 2006, respectively. There were 13 and 39 weeks, respectively, in the third quarter and nine-month periods ended June 29, 2007 and June 30, 2006, respectively.

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):

Marketable securities are categorized as available for sale and are summarized as follows as of June 29, 2007 (in thousands):

Marketable securities are categorized as available for sale and are summarized as follows as of September 29, 2006 (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):

Amortization expense related to intangible assets are as follows (in thousands):

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

The deduction to goodwill during the nine-month period ended June 29, 2007 reflects the recognition of a portion of the deferred tax assets for which no benefit was previously recognized as of the date of the Merger. The future realization of certain pre-Merger deferred tax assets will be applied to reduce the carrying value of goodwill. The remaining pre-Merger deferred tax assets that could reduce goodwill in future periods are $30.4 million as of June 29, 2007.

Annual amortization expense related to intangible assets for the next five fiscal 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 initial redemption price of the 2007 Convertible Notes prior to maturity 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 issued in March 2007.

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

Junior Notes represent the Company’s 4.75% convertible subordinated notes due November 2007. These Junior Notes can be converted into 110.4911 shares of common stock per $1,000 principal balance, which is the equivalent of a conversion price of approximately $9.05 per share. The Company may redeem the Junior Notes at any time for $1,000 per $1,000 principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date. Holders may require the Company to repurchase the Junior Notes upon a change in control of the Company. The Company pays interest in cash semi-annually in arrears on May 15 and November 15 of each year. On March 29, 2007, the Company redeemed $130.0 million in aggregate principal amount of the Junior Notes at a redemption price of $1,000 per $1,000 principal amount of notes plus $2.3 million in accrued and unpaid interest.

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 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. 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 June 29, 2007, Skyworks USA had borrowed $50.0 million under this agreement.

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 could have, individually or in the aggregate, a material adverse effect on our business, financial condition, and results of operations or cash flows.

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. 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.

The Company recorded additional restructuring charges of $4.9 million related to the exit of the baseband product area during the nine-month period ended June 29, 2007. These charges consist of $4.5 million relating to the exit of certain operating leases, $0.5 million relating to additional severance, $1.4 million related to the write-off of technology licenses and design software, offset by a $1.5 million credit related to the reversal of a reserve originally recorded to account for an engineering vendor charge associated with the exit of the baseband product area.

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

The Company identified approximately $0.5 million of excess license and software write-off reserves and $0.1 million of excess lease obligation reserves at June 29, 2007, and reclassified these reserves to fund additional requirements for workforce reductions.

The Company anticipates that most the remaining payments associated with the exit of the baseband product area will be remitted during the balance of fiscal year 2007 and fiscal year 2008.

The Company assumed approximately $7.8 million of restructuring reserves from Alpha in connection with the Merger. During the three-month period ended June 29, 2007 the Company recorded an additional $0.8 million charge relating to a single lease obligation that expires in 2008. The restructuring reserve balance at June 29, 2007 related to this plan was $1.3 million, and primarily relates to estimated future payments on the above lease that expires in 2008.

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 ended June 29, 2007 and June 30, 2006 included share-based compensation expense under SFAS 123(R) of $3.6 million and $3.7 million, respectively. Net income for the nine-month period ended June 29, 2007 and June 30, 2006 included share-based compensation expense under SFAS 123(R) of $9.7 million and $10.3 million, respectively. Share-based compensation expense for the three-month period ended June 29, 2007 included $2.3 million on employee stock options, $0.5 million on non-vested restricted stock with service and market conditions, $0.2 million on non-vested restricted stock with service conditions, $0.3 million on performance shares, and $0.3 million on the Employee Stock Purchase Plan (“ESPP”). Share-based compensation expense for the three-month period ended June 30, 2006 included $3.0 million on employee stock options, $0.2 million on non-vested restricted stock with service and market conditions, $0.1 million on non-vested restricted stock with service conditions, and $0.4 million on the Company’s ESPP. Share-based compensation expense for the nine-month period ended June 29, 2007 included $5.4 million on employee stock options, $2.0 million on non-vested restricted stock with service and market conditions, $0.8 million on non-vested restricted stock with service conditions, $0.5 million on performance shares, and $1.0 million on the Company’s ESPP. Share-based compensation expense for the nine-month period ended June 30, 2006 included $8.3 million on employee stock options, $0.5 million on non-vested restricted stock with service and market conditions, $0.2 million on non-vested restricted stock with service conditions, and $1.3 million on the Company’s ESPP.

During the nine-month period ended June 29, 2007, the dilutive effect of in-the-money equity-based awards was approximately 1.1 million shares or 0.7% of the basic shares outstanding based on the Company’s average share price of $6.86.

As of June 29, 2007 and June 30, 2006, the Company had capitalized share-based compensation expense of $0.3 million and $0.4 million in inventory. The Company did not recognize any tax benefit on the share-based compensation recorded in the three and nine-month periods ended June 29, 2007 and June 30, 2006 because we have established a valuation allowance against our net U.S. deferred tax assets.

The weighted-average estimated fair value of employee stock options granted during the three and nine-month periods ended June 29, 2007 was $3.97 per share and $3.76 per share, respectively, and the weighted-average fair value of employee stock options granted during the three and nine-month periods ended June 30, 2006 was $4.06 per share and $3.20 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 June 29, 2007. Historical volatility was determined by calculating the mean reversion of the daily-adjusted closing stock price over the past 5.0 years of the Company’s existence (post-Merger). 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 5.0 years between June 2002 (post-Merger) and June 29, 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 and nine-month periods ended June 29, 2007 is actually based on awards ultimately expected to vest, it has been reduced for annualized estimated forfeitures of 12.85%. 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 stock options 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 5.5 million shares and equity based awards exercisable for approximately 19.8 million shares were outstanding but not included in the computation of earnings per share for the three-month period ended June 29, 2007 as their effect would have been anti-dilutive. Junior Notes convertible into approximately 5.5 million shares and equity based awards exercisable for approximately 19.8 million shares were outstanding but not included in the computation of earnings per share for the nine-month period ended June 29, 2007 as their effect would have been anti-dilutive. If the Company had earned at least $19.5 million and $59.2 million in net income for the three and nine-month periods ended June 29, 2007, respectively, 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 or nine-month period ended June 29,2007 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 23.7 million shares were outstanding but not included in the computation of earnings per share for the three-month period ended June 30, 2006 as their effect would have been anti-dilutive. Junior Notes convertible into

approximately 19.8 million shares and equity based awards exercisable into approximately 24.4 million shares were outstanding but not included in the computation of earnings per share for the nine-month period ended June 30, 2006 as their effect would have been anti-dilutive. If the Company had earned at least $19.9 million and $62.7 million in net income for the three and nine-month periods ended June 30, 2006, respectively, 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 and nine-month periods ended June 29, 2007 and June 30, 2006:

During the nine-month period ended June 29, 2007, certain key factors contributed to our overall results of operations and cash flows from operations. More specifically:

We market and sell our semiconductor products (including power amplifiers, front-end modules, radio solutions and linear products among others) 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.

Overall, net revenues decreased 11.2% and 5.0% for the third fiscal quarter of 2007 and the nine-month period ended June 29, 2007, respectively, as compared to the corresponding periods in the prior fiscal year. These declines were primarily due to a reduction in baseband product area revenues and a significant decline in revenues to one of our large tier-one handset OEMs. However, revenues from our Core Products increased by $11.7 million, or 2.2%, for the nine-month period ended June 29, 2007, as compared to the nine-month period ended June 30, 2006. Revenue growth in our higher margin linear products area was the principal contributor to the overall revenue growth from our Core Products. As a result of the sales of a greater mix of higher functionality, more complex, higher content and differentiated front end solutions and multimode radios as compared to simpler, less complex and lower content solutions, overall average selling prices declined by only 4.9% in the first nine-month period of fiscal 2007 as compared to 11.7% in the corresponding period of fiscal 2006. Net revenues from our top three customers decreased to 46.8% in the third quarter of fiscal 2007 from 50.3% in the third quarter of fiscal 2006.

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 expenses) associated with product manufacturing and sustaining engineering expenses pertaining to products sold.

The increase in gross profit as a percentage of revenue for both the three and nine-month periods ended June 29, 2007 as compared to the corresponding periods in the previous fiscal year was principally the result of a richer revenue mix achieved due to the higher gross profit margin Core Products being a greater percentage of overall sales since we exited the lower margin baseband product area at the end of fiscal 2006. Furthermore, we improved absorption as our factory utilization increased and we experienced improved overall yields and lower scrap while increasing the number of products we assemble and test in-house. Additionally, we benefited from higher contribution margins received from the licensing and sale of intellectual property during the nine-month period ended June 29, 2007, as compared to the corresponding period in fiscal 2006. Gross profit decreased in aggregate dollars for the three and nine-month periods ended June 29, 2007 due to lower overall revenues, primarily resulting from our exit of the baseband product area and a significant decline in revenues at one of our large tier-one handset OEMs.

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 decrease in research and development expenses in aggregate dollars and as a percentage of net revenues for the three and nine-month periods ended June 29, 2007 when compared to the corresponding periods in the previous fiscal year is predominantly attributable to decreased labor and benefit costs as a result of the workforce reductions associated with the exit of our baseband product area at the end of fiscal 2006. In addition, efficiencies were achieved in the utilization of outside services, business travel and hardware/software costs. We also incurred lower research and development related share-based compensation expense during the nine-month period ended June 29, 2007, as compared to the same period in the prior year related to terminated baseband product personnel.

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 decreased in aggregate dollars for both the three and nine-month periods ended June 29, 2007 when compared to the corresponding periods in the previous fiscal year primarily as the result of lower legal and other professional fees partially offset by a bad debt charge of $1.3 million recorded on specific accounts receivable associated with the baseband product area.

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

During the three-month period ended June 29, 2007, we recorded a reduction in restructuring charges of $(0.6) million relating to the exit of the baseband product area. This primarily consisted of a $0.5 million charge related to severance and benefits and a $0.4 million charge related to lease obligations associated with the closure of certain locations, offset by a $1.5 million credit related to an engineering vendor charge associated with the baseband product area.

During the nine-month period ended June 29, 2007, we recorded additional restructuring charges of $4.9 million related to the exit of the baseband product area. These charges consist of a $4.5 million charge relating to the exit of certain operating leases, a $0.5 million charge relating to additional severance, a $1.4 million charge related to the write-down of technology licenses and design software, offset by a $1.5 million credit related to an engineering vendor charge associated with the baseband product area.

In addition, for the three and nine-month periods ended June 29, 2007, the Company recorded a charge of $0.8 million relating to lease obligations associated with the Pre-Merger Alpha Restructuring Plan.

For additional information regarding restructuring charges and liability balances, see Note 10 of Notes to Interim Consolidated Financial Statements.

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

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 and nine-month periods ended June 29, 2007 when compared to the corresponding periods in fiscal 2006 is primarily due to the retirement of $180.7 million of our higher interest rate Junior Notes which were replaced with the substantially lower interest rate 2007 Convertible Notes.

See Note 7 of Notes to Interim Consolidated Financial Statements for information related to our borrowing arrangements.

Other income, net is comprised primarily of foreign exchange gains/losses, interest income on invested cash balances and other non-operating income and expense items.

The increase in other income both in aggregate dollars and as a percentage of net revenues for the three and nine-month periods ended June 29, 2007 when compared to the corresponding periods in the previous fiscal year is primarily related to both increased interest rates and higher invested cash balances.

As a result of our history of operating losses and the expectation of future operating results, we determined that it is more likely than not that historical income tax benefits will not be realized except for certain future deductions associated with our foreign operations. Consequently, as of June 29, 2007, we have maintained a valuation allowance against all of our net U.S. deferred tax assets. Deferred tax assets have been recognized for foreign operations when management believes they will be recovered during the carry forward period.

The provision for income taxes for the three and nine-month periods ended June 29, 2007 consists of approximately $1.1 million and $2.1 million, respectively, of U.S. income taxes. Of the total U.S. income tax provision, $0.8 million and $1.5 million were recorded as a charge reducing the carrying value of goodwill for the three and nine-month periods ended June 29, 2007. As noted in our Annual Report on Form 10-K, no benefit has been recognized for certain pre-Merger 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 pre-Merger 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 and nine-month periods ended June 29, 2007, consists of approximately $0.1 million and $0.5 million, respectively, of foreign income taxes incurred by foreign operations.

The provision for income taxes for the three and nine-month periods ended June 30, 2006 consisted of approximately $1.2 million and $3.5 million, respectively, of foreign income taxes incurred by foreign operations. The provision for income taxes for the three and nine-month periods ended June 30, 2006 consisted of $0.4 million and $1.8 million of foreign taxes related to the reduction of the carrying value of the deferred tax asset attributable to our Mexico operations. In the fourth quarter of fiscal 2006, the Company reorganized its Mexico operations. As a result, the long-term deferred tax asset relating to the impairment of its Mexico assets was written off because the machinery and equipment was transferred to a United States company. Therefore, the income tax provision for the three and nine-month periods ended June 29, 2007 does not include any amortization related to the deferred to tax asset.

For the nine-month period ended June 29, 2007, U.S. income tax was provided on current earnings attributable to our Mexico operations. No provision has been made for U.S. 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 U.S. source income in the future, which may result in the 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.

Based on our results of operations for fiscal 2006 and the first nine months of fiscal 2007 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 (to replace existing or maturing debt instruments), 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 would 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 and cash equivalent balances and short-term investments increased $63.2 million to $228.1 million at June 29, 2007 from $164.9 million at September 29, 2006. The number of day’s sales outstanding for the three-month period ended June 29, 2007 decreased to 85 from 94 for the corresponding period in the previous fiscal year primarily due to accounts receivable reserves recorded in the fourth quarter of fiscal 2006 related to the exit of the baseband product area. Annualized inventory turns for the three-month period ended June 29, 2007 were 5.1 compared to 4.8 for the corresponding period in the previous fiscal year.

During the nine-month period ended June 29, 2007, we generated $54.8 million in cash from operating activities as we achieved net income of $35.7 million offset by an increase in receivables of $7.3 million, an increase in inventory balances of $1.9 million, a decrease in accounts payable of $15.4 million, and a decrease in other liabilities of $6.8 million. We incurred multiple non-cash charges (e.g., depreciation, amortization, contribution of common shares to savings and retirement plans, charges in lieu of income tax expense, share-based compensation expense and non-cash restructuring expense) totaling $50.7 million.

Cash used in investing activities for the nine-month period ended June 29, 2007, consisted of net purchases of $46.8 million in auction rate securities and capital expenditures of $30.5 million. 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 acquisition opportunities to extend our technology portfolio and design expertise and to expand our product offerings.

Cash provided by financing activities for the nine-month period ended June 29, 2007, primarily is comprised of gross proceeds of $200.0 million from our 2007 Convertible Notes offering and stock option exercises of $6.1 million, offset by repayment of $130.0 million on our Junior Notes, a common stock buyback of 4.3 million shares at a cost of $30.7 million, and financing costs associated with our 2007 Convertible Notes offering of $6.2 million.

In connection with our exit of the baseband product area, we anticipate making remaining cash payments of approximately $5.5 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 contractual obligations disclosure in our annual report on Form 10-K for the year ended September 29, 2006 has not materially changed since we filed that report, with the exception that we reclassified our Junior Notes from long-term debt to short-term debt in the quarter ended December 29, 2006 due to the fact that such notes are due in November 2007. Our short-term debt is more fully described in Note 7 of this Form 10-Q. In addition, on March 2, 2007, the Company issued $200.0 million aggregate principal amount of convertible subordinated notes (“2007 Convertible Notes”) and, subsequently redeemed $130.0 million of Junior Notes. Our long-term debt is more fully described in Note 7 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. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company expects to adopt FIN 48 on September 29, 2007, the first day of fiscal 2008 and has not yet determined the impact this interpretation will have on our 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 this FASB will have on our results from operations or financial position.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”) which requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s over funded status or a liability for a plan’s under funded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year; and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in other comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of fiscal years ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008, although earlier adoption is permitted. The Company has not yet determined the impact that SFAS 158 will have on our results from operations or financial position.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect the impact of SAB 108 will be material to its financial statements.

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.

We have exposure to foreign exchange and interest rate risk. 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 29, 2006.

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 June 29, 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 June 29, 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 June 29, 2007 that has materially affected, or is reasonably likely to materially affect, Skyworks’ internal control over financial reporting.

In addition to the other information set forth in this report, including in the first paragraph under “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 29, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. The risk factors below are in addition to, or updates of, the risk factors previously included in our Annual Report on Form 10-K.

The wireless communications semiconductor industry in general and the markets in which we compete in particular are intensely competitive. We compete with U.S. and international semiconductor manufacturers of all sizes in terms of resources and market share, including RF Micro Devices, Anadigics and TriQuint Semiconductor. As we expand in the linear products market, we will compete with companies in other industries, including Analog Devices, Hittite Microwave, Linear Technology and Maxim Integrated Products.

We currently face significant competition in our markets and expect that intense price and product competition will continue. This competition has resulted in, and is expected to continue to result in, declining average selling prices for our products and increased challenges in maintaining or increasing market share. Furthermore, additional competitors may enter our markets as a result of growth opportunities in communications electronics, the trend toward global expansion by foreign and domestic competitors and technological and public policy changes. We believe that the principal competitive factors for semiconductor suppliers in our markets include, among others:

We cannot assure you that we will be able to successfully address these factors. Many of our competitors enjoy the benefit of:

As a result, certain competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the development, promotion and sale of their products than we can.

Current and potential competitors have established or may in the future establish, financial or strategic relationships among themselves or with customers, resellers or other third parties. These relationships may affect customers’ purchasing decisions. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Furthermore, some of our customers have divisions that internally develop or manufacture products similar to ours, and may compete with us. We cannot assure you that we will be able to compete successfully against current and potential competitors. Increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our business, financial condition and results of operations.

Significant portions of our sales are concentrated among a limited number of customers. If we lost one or more of these major customers, or if one or more major customers significantly decreased its orders for our products, our business would be materially and adversely affected. Sales to our three largest customers in fiscal 2006, Motorola, Inc., Sony Ericsson Mobile Communication AB and Asian Information Technology, Inc., including sales to their manufacturing subcontractors, represented approximately 50% of our net revenue for fiscal 2006. Although we expect that our largest customers will continue to account for a substantial portion of our net revenue in fiscal 2007, a large customer of ours recently experienced reduced demand for its products. A sustained decrease in orders from this customer could materially and adversely affect our results from operations.

On July 25, 2007, the Financial Accounting Standards Board (“FASB”) approved a proposal that would alter the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. If adopted, this proposal could significantly increase the non-cash interest expense associated with our existing $200 million 2007 Convertible Notes including interest expense in prior periods. The exact impact of this proposal to the

Company’s financial statements will not be known until such time that the proposal is finalized. We will monitor the developments of this proposal and will comply with any new requirements.

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 or refrain from using it.
Any litigation to determine the validity of claims that our products infringe or may infringe intellectual property rights of another, including claims arising from our contractual indemnification of our customers, regardless of their merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. Regardless of the merits of any specific claim, we cannot assure you that we would prevail in litigation because of the complex technical issues and inherent uncertainties in intellectual property litigation. If litigation were to result in an adverse ruling, we could be required to:

We cannot assure you that our operating results or financial condition will not be materially adversely affected if we, or one of our customers, were required to do any one or more of the foregoing items.

In addition, if another supplier to one of our customers, or a customer of ours itself, were found to be infringing upon the intellectual property rights of a third party, the supplier or customer could be ordered to cease the manufacture, import, use, sale or offer for sale of its infringing product(s) or process(es), either of which could result, indirectly, in a decrease in demand from our customers for our products. If such a decrease in demand for our products were to occur, it could have an adverse impact on our operating results.

(c)

The following table provides information regarding repurchases of common stock made by us during the fiscal quarter ended June 29, 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.