Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2016
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________to__________
Commission file number 001-05560
SKYWORKS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
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Delaware | 04-2302115 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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20 Sylvan Road, Woburn, Massachusetts | 01801 |
(Address of principal executive offices) | (Zip Code) |
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Registrant’s telephone number, including area code: (781) 376-3000 |
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | Name of Each Exchange on Which Registered |
Common Stock, par value $0.25 per share | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
þ Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (based on the closing price of the registrant’s common stock as reported on the NASDAQ Global Select Market on the last business day of the registrant’s most recently completed second fiscal quarter April 1, 2016) was approximately $14,812,361,660. The number of outstanding shares of the registrant’s common stock, par value $0.25 per share, as of November 11, 2016, was 185,813,926.
DOCUMENTS INCORPORATED BY REFERENCE
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Part of Form 10-K | | Documents from which portions are incorporated by reference |
Part III | | Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2017 Annual Meeting of Stockholders (to be filed) are incorporated by reference into Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K. |
SKYWORKS SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED SEPTEMBER 30, 2016
TABLE OF CONTENTS
CAUTIONARY STATEMENT
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the “safe harbor” created by those sections. Any statements that are not statements of historical fact should be considered to be forward-looking statements. Words such as “anticipates”, “believes”, “continue”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predicts”, “projects”, “seek”, “should”, “targets”, “will”, “would”, and similar expressions or variations or negatives of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. Additionally, forward-looking statements include, but are not limited to:
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• | our plans to develop and market new products, enhancements or technologies and the timing of these development and marketing plans; |
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• | our estimates regarding our capital requirements and our needs for additional financing; |
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• | our estimates of our expenses, future revenues and profitability; |
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• | our estimates of the size of the markets for our products and services; |
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• | our expectations related to the rate and degree of market acceptance of our products; and |
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• | our estimates of the success of other competing technologies that may become available. |
Although forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements involve inherent risks and uncertainties and actual financial results and outcomes may differ materially and adversely from the results and outcomes discussed in or anticipated by the forward-looking statements. A number of important factors could cause actual financial results to differ materially and adversely from those in the forward-looking statements. We urge you to consider the risks and uncertainties discussed elsewhere in this report and in the other documents filed by us with the Securities and Exchange Commission (“SEC”) in evaluating our forward-looking statements. We have no plans, and undertake no obligation, to revise or update our forward-looking statements to reflect any event or circumstance that may arise after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.
This Annual Report also contains estimates made by independent parties and by us relating to market size and growth and other industry data. These estimates involve a number of assumptions and limitations and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of important factors, including those described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These and other factors could cause results to differ materially and adversely from those expressed in the estimates made by the independent parties and by us.
In this document, the words “we”, “our”, “ours”, “us”, and “the Company” refer only to Skyworks Solutions, Inc., and its consolidated subsidiaries and not any other person or entity. In addition, the following is a list of industry standards that may be referenced throughout the document:
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• | BiFET (Bipolar Field Effect Transistor): integrates indium gallium phosphide based heterojunction bipolar transistors with field effect transistors on the same gallium arsenide substrate |
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• | DC (Direct Current): unidirectional flow of an electrical charge |
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• | CMOS (Complementary Metal Oxide Semiconductor): a technology of constructing integrated circuits |
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• | GaAs (Gallium Arsenide): a compound of the elements gallium and arsenic that is used in the production of semiconductors |
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• | HBT (Heterojunction Bipolar Transistor): a type of bipolar junction transistor which uses differing semiconductor materials for the emitter and base regions, creating a heterojunction |
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• | IoT (Internet of Things): is the interconnection of uniquely identifiable embedded computing devices within the existing internet infrastructure |
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• | LED (Light Emitting Diode): a two-lead semiconductor light source |
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• | LTE (Long Term Evolution): 4th generation (“4G”) radio technologies designed to increase the capacity and speed of mobile telephone networks |
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• | pHEMT (Pseudomorphic High Electron Mobility Transistor): a type of field effect transistor incorporating a junction between two materials with different band gaps |
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• | RF (Radio Frequency): electromagnetic wave frequencies that lie in the range extending from around 3 kHz to 300 GHz |
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• | SAW (Surface Acoustic Wave): electrical input signal is converted to an acoustic wave for filtering and converted back into an electrical signal by interdigitated transducers on a piezoelectric substrate. |
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• | SOI (Silicon On Insulator): technology refers to the use of layered silicon-insulator-silicon substrate in place of conventional silicon substrates in semiconductor manufacturing |
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• | TC-SAW (Temperature Compensated Surface Acoustic Wave): SAW filters that have been designed to reduce shift in frequency over temperature. |
Skyworks, the star design logo, SkyOne, SkyBlue, and SkyLiTE are trademarks or registered trademarks of Skyworks Solutions, Inc. or its subsidiaries in the United States and in other countries. All other brands and names listed are trademarks of their respective companies.
PART l
ITEM 1. BUSINESS.
Skyworks Solutions, Inc., together with its consolidated subsidiaries (“Skyworks” or the “Company”), is empowering the wireless networking revolution. Our highly innovative analog semiconductors are connecting people, places, and things, spanning a number of new and previously unimagined applications within the automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and wearable markets.
Our key customers include Arris, Bose, Cisco, Dell, Foxconn, Fujitsu, General Electric, Google, Honeywell, HTC, Huawei, Landis & Gyr, Lenovo, LG Electronics, Microsoft, Nest, Netgear, Northrop Grumman, OPPO, Rockwell Collins, Samsung, Sonos, VIVO, and ZTE. Our competitors include Analog Devices, Broadcom, Maxim Integrated Products, Murata Manufacturing, NXP Semiconductors, QUALCOMM and Qorvo.
We are a Delaware corporation that was formed in 1962. We changed our corporate name from Alpha Industries, Inc. to Skyworks Solutions, Inc. on June 25, 2002, following a business combination. We operate worldwide with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America. Our Internet address is www.skyworksinc.com. We make available free of charge on our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 filings on Forms 3, 4 and 5, and amendments to those reports as soon as practicable after we electronically submit such material to the SEC. The information contained on our website is not incorporated by reference in this Annual Report. You may read and copy materials that we have filed with the SEC at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public at www.sec.gov.
In August 2016, we acquired the remaining 34% interest in a joint venture that was initially created in August 2014 with Panasonic Corporation, through its Automotive & Industrial Systems Company (“Panasonic”) for the design, manufacture and sale of Panasonic’s SAW and TC-SAW filter products. The joint venture was dissolved and is now a wholly-owned subsidiary of the Company. With the overall demand for SAW and TC-SAW filters increasing as the technology and product architectures become more complex and the number of required bands grows, this investment assists us in securing a consistent supply of SAW and TC-SAW filters, in addition to allowing us to integrate filters into the design and production of our own products.
In January 2012, we acquired Advanced Analogic Technologies Inc. (“AATI”) and accelerated our entry into vertical markets with highly complementary analog semiconductor product lines, including battery chargers, DC/DC converters, voltage regulators and LED drivers. Power management semiconductors represent a strategic growth market for us in applications like voltage regulation, energy efficiency and panel backlighting within the consumer electronics, computing and communications markets.
In June 2011, we acquired SiGe Semiconductor, Inc. (“SiGe”) and expanded our RF front-end solutions to facilitate wireless multimedia across a wide range of new applications. The acquisition of SiGe complemented our strong position in wide area front-end solutions by adding SiGe’s innovative short range, silicon-based products. As a result, today we offer customers a comprehensive wireless networking portfolio, supporting all key operating frequencies with greater architectural flexibility to address a variety of high growth applications.
INDUSTRY BACKGROUND
Wireless connectivity is exploding, fueled by a powerful underlying demand to connect everyone and everything all the time. Semiconductor devices continue becoming smaller, more powerful, and easier to integrate across multiple communication protocols, which is enabling the Internet of Things. The billions of connected devices that comprise the Internet of Things are being enabled and powered by a combination of sensors, microcontrollers, as well as connectivity and power management solutions. According to Cisco’s Annual Visual Networking report, between 2015 and 2020, the Internet of Things will grow faster than any other category of connected devices. In particular, the number of machine-to-machine connections is expected to grow from 4.9 billion in 2015 to 12.2 billion in 2020, with machine-to-machine connections representing nearly half of total connected devices.
As a result, these trends provide the Company with growth opportunities across new and emerging markets and applications. This is helping to fuel our growth and expand our served markets. In fact, today there are a number of groundbreaking devices leveraging Skyworks’ technology—from the newest smartphones to the factory floor to hospitals and medical providers to the automated home, connected car, and wearables. Skyworks is enabling these opportunities with highly customized system
solutions supporting a broad set of wireless protocols, including cellular LTE, Wi-Fi, Bluetooth, Zigbee and emerging 5G standards.
Within smartphones and other mobile platforms, we are benefiting from the complexity associated with the increasing number of frequency bands as well as from the multitude of RF design challenges brought about as consumers use their devices to stream video, make purchases, network on social media platforms, participate in online gaming, pay bills and much more. These design challenges require a broad set of core competencies to ensure seamless handoffs between multiple air interface standards and to effectively address signal transmission and conditioning, power management, voltage regulation, filtering and tuning complexities. As a result, our customers’ needs have dramatically moved away from discrete components toward customized integrated solutions that integrate adjacent functionality and analog content.
At the same time, in emerging markets around the world, the demand for mobile connectivity continues to grow as the industry drives toward connecting the billions of people who remain unconnected. According to the Global Semiconductor Market Association, more than 65 percent of the global population will use smartphones by 2020, with emerging markets forecasted to lead this growth.
Solving Connectivity Challenges
The transition to ubiquitous connectivity, however, does not come without challenges to existing architectures. RF solutions in ultra-thin, high performance consumer products must increase data rates, solve signal interference problems, and occupy minimal board space while at the same time increasing battery life. Meeting these design challenges requires broad competencies including signal transmission and conditioning, the ability to ensure seamless hand-offs between multiple standards, power management, voltage regulation, battery charging, filtering and tuning, among others. This complexity plays directly to our strengths. We have a strong heritage in analog systems design and have spent the last decade investing in key technologies and resources. We are at the forefront of advanced multi-chip module integration and offer unmatched technology breadth, providing deep expertise in CMOS, SOI, GaAs and filters and maintaining strategic partnerships with outside foundries.
SKYWORKS’ STRATEGY
Our overall strategy is to enable all forms of connectivity through semiconductor innovation. Key elements of our strategy include:
Industry-Leading Technology
As the industry migrates to more complex LTE architectures across a multitude of wireless broadband applications, we are uniquely positioned to help mobile device manufacturers handle growing levels of system complexity in the transmit and receive chain. The trend towards increasing front-end and analog design challenges in smartphones and other mobile devices plays directly into our core strengths and positions us to address these challenges. We believe that we offer the broadest portfolio of radio and analog solutions from the transceiver to the antenna as well as all required manufacturing process technologies. Our expertise includes BiFET, CMOS, HBT, pHEMT, SOI and silicon germanium processes. We also hold strong technology leadership positions in passive devices, advanced integration including proprietary shielding and 3-D die stacking, as well as SAW and TC SAW filters. Our product portfolio is reinforced by a library of approximately 2,600 worldwide patents and other intellectual property that we own and control. Together, our industry-leading technology enables us to deliver the highest levels of product performance and integration.
Customer Relationships
Given our scale and technology leadership, we are engaged with key original equipment manufacturers (“OEM”), smartphone providers and baseband reference design partners. Our customers value our supply chain strength, our innovative technology and our system engineering expertise resulting in deep customer loyalty. We partner with our customers to support their long-term product road maps and are valued as a system solutions provider rather than just a point product vendor.
Diversification
We are diversifying our business in three areas: our addressed markets, our customer base and our product offerings to enable stronger and more consistent financial returns. By leveraging core analog and mixed signal technologies, we are expanding our family of solutions to a set of increasingly diverse end markets and customers. We are steadily growing our business beyond just mobile devices (where we support all top-tier manufacturers, including the leading smartphone suppliers and key baseband vendors) into additional high-performance analog markets, including automotive, home and factory automation, infrastructure, medical, smart energy and wireless networking. In these markets we leverage our scale, intellectual property and worldwide distribution network, which spans over 2,000 customers and over 2,500 analog components.
Delivering Operational Excellence
We either vertically integrate our supply chain where we can create a competitive advantage, or enter into alliances and strategic relationships for leading-edge capabilities. This hybrid manufacturing model allows us to better balance our manufacturing capacity with the demands of the marketplace. Internally, our capacity utilization remains high and we have therefore been able to maintain margins and achieve our desired return on invested capital on a broader range of revenue.
Additionally, we continue to strive to achieve the industry’s shortest product design and manufacturing cycle times and highest product yields. The combination of agile, flexible capacity and world-class module manufacturing and scale advantage allows us to achieve low product costs while integrating multiple technologies into highly sophisticated multi-chip modules.
Maintaining a Performance Driven Culture
We consider our people and corporate culture to be a major competitive advantage and a key driver of our overall strategy. We create key performance indicators that align employee performance with corporate strategy and link responsibilities with performance measurement. Accountability is paramount and we compensate our employees through a pay-for-performance methodology. We strive to be an employer-of-choice among peer companies and have created a work environment in which turnover is well below semiconductor industry averages.
Generating Superior Operating Results and Shareholder Returns
We seek to generate financial returns that are comparable to a highly diversified analog semiconductor company while delivering high growth rates representative of a mobile internet company. Given our product volume and overall utilization we strive to achieve a best-in-class return on investment and operating income to reward shareholders with increasing returns.
OUR PRODUCT PORTFOLIO
Our product portfolio consists of various solutions, including:
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• | Amplifiers: the modules that strengthen the signal so that it has sufficient energy to reach a base station |
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• | Attenuators: circuits that allow a known source of power to be reduced by a predetermined factor (usually expressed as decibels) |
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• | Circulators/Isolators: ferrite-based components commonly found on the output of high-power amplifiers used to protect receivers in wireless transmission systems |
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• | DC/DC Converters: an electronic circuit which converts a source of direct current from one voltage level to another |
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• | Demodulators: a device or an RF block used in receivers to extract the information that has been modulated onto a carrier or from the carrier itself |
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• | Detectors: devices used to measure and control RF power in wireless systems |
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• | Diodes: semiconductor devices that pass current in one direction only |
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• | Directional Couplers: transmission coupling devices for separately sampling the forward or backward wave in a transmission line |
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• | Diversity Receive Modules: devices used to improve receiver sensitivity in high data rate LTE applications |
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• | Filters: devices for recovering and separating mixed and modulated data in RF stages |
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• | Front-End Modules: power amplifiers that are integrated with switches, duplexers, filters and other components to create a single package front-end solution |
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• | Hybrid: a type of directional coupler used in radio and telecommunications |
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• | LED Drivers: devices which regulate the current through a light emitting diode or string of diodes for the purpose of creating light |
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• | Low Noise Amplifiers: devices used to reduce system noise figure in the receive chain |
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• | Mixers: devices that enable signals to be converted to a higher or lower frequency signal and thereby allowing the signals to be processed more effectively |
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• | Modulators: devices that take a baseband input signal and output a radio frequency modulated signal |
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• | Optocouplers/Optoisolators: semiconductor devices that allow signals to be transferred between circuits or systems while ensuring that the circuits or systems are electrically isolated from each other |
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• | Phase Locked Loops: closed-loop feedback control system that maintains a generated signal in a fixed phase relationship to a reference signal |
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• | Phase Shifters: designed for use in power amplifier distortion compensation circuits in base station applications |
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• | Power Dividers/Combiners: utilized to equally split signals into in-phase signals as often found in balanced signal chains and local oscillator distribution networks |
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• | Receivers: electronic devices that change a radio signal from a transmitter into useful information |
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• | Switches: components that perform the change between the transmit and receive function, as well as the band function for cellular handsets |
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• | Synthesizers: devices that provide ultra-fine frequency resolution, fast switching speed, and low phase-noise performance |
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• | Technical Ceramics: polycrystalline oxide materials used for a wide variety of electrical, mechanical, thermal and magnetic applications |
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• | Voltage Regulators: generate a fixed level which ideally remains constant over varying input voltage or load conditions |
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• | Voltage Controlled Oscillators/Synthesizers: fully integrated, high performance signal source for high dynamic range transceivers |
We believe we possess broad technology capabilities and one of the most complete wireless communications product portfolios in the industry.
MARKETING AND DISTRIBUTION
Our products are sold globally through a direct sales force, electronic component distributors and independent sales representatives. Certain distributors have agreements with us which allow for certain sales returns, stock rotations and price protection on certain inventory if we lower the price of those products (see “Critical Accounting Estimates” in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 to Item 8 of this Annual Report on Form 10-K for further detail on revenue reserves). As is customary in the semiconductor industry, our distributors may also market other products that compete with ours.
Our sales engagement begins at the earliest stages of the design of an existing or potential customer’s product. We collaborate technically with our customers and reference design partners at the inception of new programs. These relationships allow our team to facilitate customer-driven solutions, which leverage the unique strength of our intellectual property and product portfolio while providing high value and greatly reducing time-to-market.
We believe the technical and complex nature of our products and markets demand an extraordinary commitment to maintain close ongoing relationships with our customers. As such, we strive to expand the scope of our customer relationship to include design, engineering, manufacturing, procurement, logistics and project management. We also employ a collaborative approach in developing these relationships by combining the support of our design teams, applications engineers, manufacturing personnel, sales and marketing staff and senior management. Lastly, we leverage our customer relationships with cross-selling opportunities across product lines in order to maximize revenue.
We believe that maintaining frequent and interactive contact with our customers is paramount to our continuous efforts to provide world-class sales and service support. By listening and responding to feedback, we are able to mobilize resources to raise our level of customer satisfaction, improve our ability to anticipate future product needs, and enhance our understanding of key market dynamics. We are confident that diligently following this path positions us to participate in numerous opportunities for growth in the future.
CUSTOMER CONCENTRATION
A small number of customers historically has accounted for a significant portion of our net revenue. In the fiscal years ended September 30, 2016 (“fiscal 2016”) and October 3, 2014 (“fiscal 2014”), two customers—Foxconn Technology Group (together with its affiliates and other suppliers to a large OEM for use in multiple applications including smartphones, tablets, routers, desktop and notebook computers, “Foxconn”) and Samsung Electronics (“Samsung”)—each constituted more than ten percent of our net revenue. In the fiscal year ended October 2, 2015 (“fiscal 2015”), Foxconn constituted more than ten percent of our net revenue. For further information regarding customer concentrations see Note 16 to Item 8 of this Annual Report on Form 10-K.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We own or have a license to use numerous United States and foreign patents and patent applications related to our products and our manufacturing operations and processes. In addition, we own a number of trademarks and service marks applicable to certain of our products and services. We believe that our intellectual property, including patents, patent applications, trade secrets and trademarks, is of material importance to our business. We rely on patent, copyright, trademark, trade secret and other intellectual property laws, as well as non-disclosure and confidentiality agreements and other methods, to protect our confidential and proprietary technologies, designs, devices, algorithms, processes and other intellectual property. Our efforts may not meaningfully protect our intellectual property, or others may independently develop substantially equivalent or superior proprietary technologies, designs, devices, algorithms, processes or other intellectual property. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and effective copyright, patent, trademark and trade secret protection may not be available in those jurisdictions. In addition to protecting our intellectual property, we strive to strengthen our intellectual property
portfolio to enhance our ability to obtain cross-licenses of intellectual property from others, to obtain access to intellectual property we do not possess and to more favorably resolve potential intellectual property claims against us. Due to rapid technological changes in the industry, we believe establishing and maintaining a technological leadership position depends primarily on our ability to develop new, innovative products through the technical competence of our engineering personnel.
COMPETITIVE CONDITIONS
The competitive environment in the semiconductor industry is in a constant state of flux, with new products continually emerging and existing products approaching technological obsolescence. We compete on the basis of time-to-market, new product innovation, quality, performance, price, compliance with industry standards, strategic relationships with customers and baseband vendors, personnel and protection of our intellectual property. We participate in highly competitive markets against numerous competitors that 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.
Erosion of average selling prices of established products is typical of the semiconductor industry. Consistent with trends in the industry, we anticipate that average selling prices for our established products will continue to decline at a normalized rate of five to ten percent per year. We mitigate the gross margin impact of declining average selling prices with efforts to increase unit volumes, reduce material costs and lower manufacturing costs of existing products and by introducing new and higher value-added products.
RESEARCH AND DEVELOPMENT
Our products and markets demand rapid technological advancements requiring a continuous effort to enhance existing products and develop new products and technologies. Accordingly, we maintain a high level of research and development activity. We invested $312.4 million, $303.2 million and $252.2 million in research and development during fiscal 2016, fiscal 2015 and fiscal 2014, respectively. The growth in research and development expenses were the result of increases in our internal product designs and product development activity for our target markets in each of these fiscal years. Our research and development expenses include new product development and innovations in integrated circuit design, investment in advanced semiconductor manufacturing processes, development of new packaging and test capabilities and research on next generation technologies and product opportunities. We maintain close collaborative relationships with many of our customers to help identify market demands and target our development efforts to meet those demands.
RAW MATERIALS
Raw materials for our products and manufacturing processes are generally available from several sources. It is our intent not to depend on a sole source of supply unless market or other conditions dictate otherwise. However, there are limited situations where we procure certain components and services for our products from single or limited sources, and we are currently dependent on a limited number of sole source suppliers. We purchase materials and services primarily pursuant to individual purchase orders. However, we have entered into certain supply agreements for the purchase of raw materials or other manufacturing related services that specify minimum prices and purchase quantity based on our anticipated future requirements. Such amounts are reviewed and included in our contractual obligations and commitments as required. Certain of our suppliers consign raw materials to us at our manufacturing facilities to which we take title to as needed in our manufacturing process. We believe we have adequate sources for the supply of raw materials and components for our manufacturing needs with suppliers located around the world.
BACKLOG AND INVENTORY
Our sales are made pursuant to standard purchase orders and specified customer contracts for delivery of products, with such purchase orders officially acknowledged by us according to our own terms and conditions. We also maintain Skyworks-owned finished goods inventory at certain customer “hub” locations. We do not recognize revenue until these customers consume the Skyworks-owned inventory from these hub locations. Due to industry practice, which allows customers to cancel orders with limited advance notice to us prior to shipment, and with little or no penalty, we believe that backlog as of any particular date may not be a reliable indicator of our future revenue levels. The cancellation or deferral of product orders, the return of previously sold products, or overproduction due to a change in anticipated order volume could result in a reduction in revenue and us holding excess or obsolete inventory, which could result in inventory write-downs and, in turn, could have a material adverse effect on our financial condition.
ENVIRONMENTAL REGULATIONS
Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes, and other activities affecting the environment have had, and will continue to have, an impact on our manufacturing operations. Most of our customers have mandated that our products comply with various local, regional and national “green” initiatives initiated by our customers or the locations in which they operate. We believe that our current expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection, and other expenditures for the
resolution of environmental claims, will not have a material adverse effect on our liquidity and capital resources, competitive position or financial condition. Environmental regulations are subject to change in the future, and accordingly we are unable to assess the possible effect of compliance with future requirements.
SEASONALITY
Sales of our products are subject to seasonal fluctuation and periods of increased demand in end-user consumer applications, such as smartphones and tablet computing devices. The highest demand for our products generally occurs in our first fiscal quarter ending in December and the lowest demand for our handset products generally occurs in our second fiscal quarter ending in March.
GEOGRAPHIC INFORMATION
For information regarding net revenue by geographic region for each of the last three fiscal years, see Note 16 to Item 8 of this Annual Report on Form 10-K.
EMPLOYEES
As of September 30, 2016, we employed approximately 7,300 employees world-wide. Approximately 860 of our employees in Mexico, 450 employees in Singapore, and 200 employees in Japan are covered by collective bargaining and other union agreements.
ITEM 1A. RISK FACTORS.
You should carefully consider the risks described below in addition to the other information contained in this report before making an investment decision with respect to any of our securities. Our business, financial condition or results of operations could be materially impacted by any of these risks. The risks and uncertainties described below are not the only ones we face. Additional risks not currently known to us or other factors not perceived by us present significant risks to our business at this time and may impair our business operations, financial condition or results of operations.
We operate in the highly cyclical semiconductor industry, which is subject to significant downturns.
We operate in the semiconductor industry, which is cyclical and subject to rapid declines in demand for end-user products in both the consumer and enterprise markets. Uncertain worldwide economic conditions, together with other factors such as the volatility of the financial markets, continue to make it difficult for our customers and for us to accurately forecast and plan future business activities. Uncertainty and economic weakness could result in a market contraction and, as a result, our business, financial condition and results of operations would likely be materially and adversely affected. Such periods of industry downturn are characterized by diminished product demand and revenue, manufacturing overcapacity, excess inventory levels, accelerated erosion of average selling prices, bad debt, inventory and restructuring and/or asset impairment charges. Furthermore, downturns in the semiconductor industry may be prolonged, and any extended delay or failure of the market to recover from an economic downturn would materially and adversely affect our business, financial condition and results of operations beyond our current fiscal year.
Our operating results may be adversely affected by quarterly and annual fluctuations and market downturns.
Our revenues, earnings and other operating results may fluctuate significantly on a quarterly and annual basis. These fluctuations are typically the result of a number of factors, many of which are beyond our control.
These factors include, among others:
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• | changes in end-user demand for the products (principally smartphones) manufactured and sold by our customers, |
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• | the effects of competitive pricing pressures, including decreases in average selling prices of our products, |
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• | production capacity levels and fluctuations in manufacturing yields, |
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• | availability and cost of materials and services from our suppliers, |
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• | the gain or loss of significant customers, |
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• | our ability to develop, introduce and market new products and technologies on a timely basis, |
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• | new product and technology introductions by competitors, |
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• | increasing industry consolidation among our competitors, |
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• | changes in the mix of products produced and sold, |
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• | market acceptance of our products and our customers, and |
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• | intellectual property disputes, including those concerning payments associated with the licensing and/or sale of intellectual property. |
The foregoing factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our quarterly or annual operating results. If our operating results fail to meet the expectations of analysts or investors, it could materially and adversely affect the price of our common stock.
Our reliance on a small number of customers for a large portion of our sales could have a material adverse effect on the results of our 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 could be materially and adversely affected. In fiscal 2016 and fiscal 2014, two customers each accounted for greater than ten percent of our net revenue. In fiscal 2015, one customer accounted for greater than ten percent of our net revenue. For further discussion see Note 16 to Item 8 of this Annual Report on Form 10-K.
Our stock price has been volatile and may fluctuate in the future.
The trading price of our common stock has and may continue to fluctuate significantly. Such fluctuations may be influenced by many factors, including:
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• | the volatility of the financial markets, |
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• | uncertainty regarding the prospects of the domestic and foreign economies, |
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• | instability in global credit and financial markets, |
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• | our performance and prospects, |
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• | the performance and prospects of our major customers and competitors, |
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• | our revenue concentrations with relatively few customers, |
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• | the depth and liquidity of the market for our common stock, |
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• | investor perception of us and the industry in which we operate, |
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• | changes in earnings estimates, price targets or buy/sell recommendations by analysts, |
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• | domestic and international political conditions, |
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• | domestic and international tax and fiscal policy decisions, and |
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• | the ability to successfully identify, acquire and integrate acquisition candidates. |
Public stock markets have experienced price and trading volume volatility. This volatility has and continues to significantly and negatively affect the market prices of securities of many technology companies, particularly the market price of our common stock. Such volatility could materially and adversely affect the market price of our common stock in future periods.
In addition, fluctuations in our stock price, volume of shares traded, and changes in our trading multiples may make our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction. Our company has been, and in the future may be, the subject of commentary by financial news media. Such commentary may contribute to volatility in our stock price. If our operating results do not meet the expectations of securities analysts, the financial news media or investors, our stock price may decline, possibly substantially over a short period of time.
There can be no assurance that we will continue to declare cash dividends.
We intend to pay quarterly dividends subject to capital availability and periodic determinations by our Board of Directors that cash dividends are in the best interest of our stockholders.
Future dividends may be affected by, among other factors:
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• | our views on potential future capital requirements, including those related to acquisitions as well as research and development; |
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• | use of cash to consummate various acquisition transactions; |
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• | capital requirements related to stock repurchase programs; |
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• | changes in federal and state income tax laws or corporate laws; and |
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• | changes to our business model. |
Our dividend payments may change from time to time, and we cannot provide assurance that we will increase our dividend payment or declare dividends in any particular amounts or at all. A reduction in our dividend payments could have a negative effect on our stock price.
The wireless communications and analog semiconductor markets are characterized by significant competition which may cause pricing pressures, decreased gross margins and rapid loss of market share and may materially and adversely affect our business, financial condition and results of operations.
The wireless communications semiconductor industry in general and the other analog markets in which we compete in particular are very competitive. We compete with international and United States semiconductor manufacturers of all sizes in terms of resources and market share, including, but not limited to, Analog Devices, Broadcom, Maxim Integrated Products, Murata Manufacturing, NXP Semiconductors, QUALCOMM, and Qorvo.
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 revenue, gross margin and 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:
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• | rapid time-to-market and product ramps, |
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• | timely new product innovation, |
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• | product quality, reliability and performance, |
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• | product cost and selling price, |
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• | features available in products, |
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• | alignment with customer performance specifications, |
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• | compliance with industry standards, |
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• | strategic relationships with customers, |
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• | access to and protection of intellectual property, |
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• | ability to partner with or participate in reference designs of baseband vendors, and |
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• | maintaining access to manufacturing capacity, raw materials, supplies and services at a competitive cost. |
We might not be able to successfully address these factors. Many of our competitors enjoy the benefit of:
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• | long presence in key markets, |
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• | high levels of customer satisfaction, |
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• | strong baseband partnership/participation in reference designs, |
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• | a broad product portfolio allowing them to bundle product offerings, |
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• | ownership or control of key technology or intellectual property, and |
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• | strong financial, sales and marketing, manufacturing, distribution, technical or other resources. |
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. As a result of industry consolidation, certain competitors may be able to further exploit such benefits to strengthen their competitive position.
Our baseband reference design partners may leverage their market position by integrating additional functionality into their product offerings that compete with our solutions. If such a product offering were competitive with our solution as to performance, price and quality, our business could be adversely impacted.
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. We may not be able to compete successfully against current and potential competitors. Increased competition could result in pricing pressures, decreased gross margins and loss of revenue and market share and may materially and adversely affect our business, financial condition and results of operations.
Our success depends upon our ability to develop new products and reduce costs in a timely manner.
The semiconductor industry generally and, in particular, many of the markets into which we sell our products, are highly cyclical and characterized by constant and rapid technological change, continuous product evolution, price erosion, evolving technical standards, short product life cycles, increasing demand for higher levels of integration, increased miniaturization, reduced power consumption and wide fluctuations in product supply and demand. Our operating results depend largely on our ability to continue to cost-effectively introduce new and enhanced products on a timely basis. The successful development and commercialization of semiconductor devices and modules is highly complex and depends on numerous factors, including the ability:
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• | to anticipate customer and market requirements and changes in technology and industry standards, |
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• | to obtain sufficient manufacturing capacity to meet customer demand, |
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• | to define new products that meet customer and market requirements, |
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• | to complete development of new products and bring products to market on a timely basis, |
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• | to differentiate our products from offerings of our competitors, |
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• | to achieve overall market acceptance of our products, |
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• | to lengthen the time that a particular product is in demand, and |
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• | to obtain adequate intellectual property protection for our new products. |
Our ability to manufacture current products, and to develop new products, depends on, among other factors, the viability and flexibility of our own internal information technology systems.
We continually evaluate expenditures for planned product development and to choose among alternatives based on our understanding of customer technical requirements, new industry standards and expectations of future market growth. We may not be able to develop and introduce new or enhanced wireless communications semiconductor products in a timely and cost-effective manner, and our products may not satisfy customer requirements or achieve market acceptance or we may not be able to anticipate new industry standards and technological changes. We also may not be able to respond successfully to new product announcements and introductions by competitors or to changes in the design or specifications of complementary products of third parties with which our products interface. If we fail to rapidly and cost-effectively introduce new and enhanced products in sufficient quantities that meet our customers’ requirements, our business and results of operations would be materially and adversely harmed.
In addition, prices of many of our products decline, sometimes significantly, over time. Our products may become obsolete earlier than planned or may not have life cycles long enough to allow us to recoup the cost of our investment in designing such products. Accordingly, we believe that to remain competitive, we must continue to reduce the cost of producing and delivering existing products at the same time that we develop and introduce new or enhanced products. We may not be able to continue to reduce the cost of producing and delivering our products and thereby remain competitive.
If Original Equipment Manufacturers or OEMs, and Original Design Manufacturers, or ODMs, of communications electronics products do not design our products into their equipment, we will have difficulty selling those products. Moreover, a “design win” from a customer does not guarantee future sales to that customer.
Our products are not sold directly to the end-user, but are components or subsystems of other products. As a result, we rely on OEMs and ODMs of wireless communications electronics products to select our products from among alternative offerings to be designed into their equipment. Without these “design wins,” we would have difficulty selling our products. If a manufacturer designs another supplier’s product into one of its product platforms, it is more difficult for us to achieve future design wins with that platform because changing suppliers involves significant cost, time, effort and risk on the part of that manufacturer. Also, achieving a design win with a customer does not ensure that we will receive revenue from that customer. Even after a design win, the customer is not obligated to purchase our products and can choose at any time to reduce or cease use of our products, for example, if its own products are not commercially successful, or for any other reason. We may not continue to achieve design wins or to convert design wins into actual sales, and failure to do so could materially and adversely affect our operating results. Furthermore, as a result of our lengthy product development and sales cycle, we may incur significant research and development expenses, and selling, general and administrative
expenses, without generating the anticipated revenue associated with these products.
Our manufacturing processes are extremely complex and specialized and disruptions could have a material adverse effect on our business, financial condition and results of operations.
Our manufacturing operations are complex and subject to disruption, including due to causes beyond our control. The fabrication of integrated circuits is an extremely complex and precise process consisting of hundreds of separate steps. It requires production in a highly controlled, clean environment. Minor impurities, contamination of the clean room environment in which our products are produced, errors in any step of the fabrication process, defects in the masks used to print circuits on a wafer, defects in equipment or materials, human error, or a number of other factors can cause a substantial percentage of our products to be rejected or to malfunction. Because our operating results are highly dependent upon our ability to produce integrated circuits at acceptable manufacturing yields, these factors could have a material and adverse effect on our business.
Additionally, our operations may be affected by lengthy or recurring disruptions of operations at any of our production facilities, as well as disruptions at facilities operated by our subcontractors or customers. These disruptions may result from electrical power outages, fire, earthquake, flooding, war, acts of terrorism, health advisories or risks, or other natural or manmade disasters, as well as equipment maintenance, repairs and/or upgrades. Disruptions of our manufacturing operations, or those of our subcontractors and customers, could cause significant delays in shipments until we are able to shift production of the impacted products from an affected facility or subcontractor to another facility or subcontractor, or until the affected customer resumes operations and accepts shipments from us. In the event of such delays, the required alternative capacity, particularly wafer production capacity, may not be available on a timely basis or at all. Even if alternative production capacity is available, we may not be able to obtain it on favorable terms, which could result in higher costs and/or a loss of customers and revenue.
Due to the highly specialized nature of the gallium arsenide integrated circuit manufacturing process, in the event of a disruption in production at our Newbury Park, California or Woburn, Massachusetts semiconductor wafer fabrication facilities as well as our assembly and test facility in Mexicali, Mexico for any reason, alternative gallium arsenide production capacity would not be immediately available from third-party sources. These disruptions could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to maintain and improve manufacturing yields that contribute positively to our gross margin and profitability.
Minor deviations or disturbances in the manufacturing process can cause substantial manufacturing yield loss, and in some cases, cause production to be suspended and impact our ability to meet customer demand on a timely basis. Manufacturing yields for new products initially tend to be lower as we complete product development and commence volume manufacturing, and typically increase as we bring the product to full production. Our forward product pricing includes this assumption of improving manufacturing yields and, as a result, material variances between projected and actual manufacturing yields will have a direct effect on our gross margin and profitability. The difficulty of accurately forecasting manufacturing yields and maintaining cost competitiveness through improving manufacturing yields will continue to be magnified by the increasing process complexity of manufacturing semiconductor products. Our manufacturing operations may also face pressures arising from the compression of product life cycles, which may require us to manufacture new products faster and for shorter periods while maintaining acceptable manufacturing yields and quality without, in many cases, reaching the longer-term, high-volume manufacturing conducive to higher manufacturing yields and declining costs.
Remaining competitive in the semiconductor industry requires transitioning to smaller geometry process technologies and achieving higher levels of design integration.
In order to remain competitive, we expect to continue to transition our products to increasingly smaller geometries. This transition requires us to modify the manufacturing processes for our products, design new products to more stringent standards, and to redesign some existing products. In the past, we have experienced some difficulties migrating to smaller geometry process technologies or new manufacturing processes, which resulted in sub-optimal manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes in the future. In some instances, we depend on our relationships with our third-party foundries to transition to smaller geometry processes successfully. Our foundries may not be able to effectively manage the transition or we may not be able to maintain our relationships with independent wafer fabrication facilities, called foundries. If our foundries or we experience significant delays in this transition or fail to efficiently implement this transition, our business, financial condition and results of operations could be materially and adversely affected. As smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, or at all.
We may be subject to warranty claims, product recalls and liability claims.
Although we invest significant resources in the testing of our products, we may discover from time to time defects in our products after they have been shipped, and we may be required to incur additional development and remediation costs, or cash payments to settle claims pursuant to warranty and indemnification provisions in our customer contracts and purchase orders. The potential liabilities associated with these, and similar, provisions in certain of our customer contracts are in some cases capped at significant amounts, and in other cases are uncapped. These problems may divert our technical and other resources from other product development efforts and could result in claims against us by our customers or third parties, including liability for costs associated with product recalls, or other obligations under customer contracts. If any of our products contain defects, or have reliability, quality or compatibility problems, our reputation may be damaged and we could be subject to liability claims, which could make it more difficult for us to sell our products to existing and prospective customers and could adversely affect our operating results. Furthermore, such losses would not be covered under our existing corporate insurance programs.
We are dependent upon third parties for the manufacture, assembly and testing of our products.
We rely upon foundries to provide silicon-based products and to supplement our gallium arsenide wafer manufacturing capacity. There are significant risks associated with reliance on third-party foundries, including:
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• | the lack of wafer supply, potential wafer shortages and higher wafer prices, |
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• | limited ability to respond to unanticipated changes in customer demand, |
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• | limited control over delivery schedules, manufacturing yields, production costs and quality assurance, and |
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• | the inaccessibility of, or delays in, obtaining access to, key process technologies. |
Although we have long-term supply arrangements to obtain additional external manufacturing capacity, the third-party foundries we use for our standby manufacturing capacity may allocate their limited capacity to the production requirements of other customers and we have no contractual right to prevent them from making such allocations. If we choose to use a new foundry to replace either existing or backup capacity, it will typically take an extended period of time for us to complete our qualification process for that foundry, which will result in a significant passage of time before we can begin shipping products from that new foundry.
Further, the third-party foundries may experience financial difficulties, be unable to deliver products to us in a timely manner or suffer damage or destruction to their facilities, particularly since some of them are located in areas prone to natural disasters. If any disruption of manufacturing capacity occurs, we may not have alternative manufacturing sources immediately available. We may therefore experience difficulties or delays in securing an adequate supply of our products, which could impair our ability to meet our customers’ needs and have a material adverse effect on our operating results.
Although we own and operate an assembly and test facility, we still depend on subcontractors to package, assemble and test certain of our products at cost-competitive rates. We do not have long-term agreements with any of our assembly or test subcontractors and typically procure services from these suppliers on a per order basis. If any of these subcontractors experiences capacity constraints or financial difficulties, suffers any damage to its facilities, experiences power outages or any other disruption of assembly or testing capacity, we may not be able to obtain alternative assembly and testing services in a timely manner and/or at cost-competitive rates. Due to the amount of time that it usually takes us to qualify assemblers and testers, we could experience significant delays in product shipments if we are required to find alternative assemblers or testers for our components. Any problems that we may encounter with the delivery, quality or cost of our products could damage our customer relationships and materially and adversely affect our results of operations.
We are dependent upon third parties for the supply of raw materials and components.
Our manufacturing operations depend on obtaining adequate supplies of raw materials and components used in our manufacturing processes at a competitive cost. Although we maintain relationships with suppliers located around the world with the objective of ensuring that we have adequate sources for the supply of raw materials and components for our manufacturing needs, increases in demand from the semiconductor industry for such raw materials and components, as well as increased demand for commodities in general, can result in tighter supplies and higher costs. Our suppliers may not be able to meet our delivery schedules, we may lose a significant or sole supplier, a supplier may not be able to meet performance and quality specifications and we may not be able to purchase such supplies or material at a competitive cost. If a supplier were unable to meet our delivery schedules or if we lost a supplier or a supplier were unable to meet performance or quality specifications, our ability to satisfy customer obligations would be materially and adversely affected. In addition, we review our relationships with suppliers of raw materials and components for our manufacturing needs on an ongoing basis. In connection with our ongoing review, we may modify or terminate our relationship with one or more suppliers. We may also enter into sole supplier arrangements to meet certain of our raw material or component needs. While we do not typically rely on a single source of supply for our raw materials, we are currently dependent on a limited
number of sole-source suppliers. If we were to lose these sole sources of supply, for any reason, a material adverse effect on our business could result until an alternate source is obtained. To the extent we enter into additional sole supplier arrangements for any of our raw materials or components, the risks associated with our supply arrangements would be exacerbated.
If we are unable to attract and retain qualified personnel to contribute to the design, development, manufacture and sale of our products, we may not be able to effectively operate our business.
As the source of our technological and product innovations, our key technical personnel represent a significant asset. Our success depends on our ability to continue to attract, retain and motivate qualified personnel, including executive officers and other key management and technical personnel. The competition for management and technical personnel is intense in the semiconductor industry, and therefore we may not be able to continue to attract and retain the qualified management and other personnel necessary for the design, development, manufacture and sale of our products. We may have particular difficulty attracting and retaining key personnel during periods of poor operating performance and/or declines in the price of our common stock, given among other factors, the use of equity-based compensation by us and our competitors. Further, existing immigration laws make it more difficult for us to recruit and retain highly skilled foreign national graduates of universities in the United States, limiting the pool of available talent. We continue to anticipate increases in human resource needs, particularly in engineering. The loss of the services of one or more of our key employees or our inability to attract, retain and motivate qualified personnel, could have a material adverse effect on our ability to operate our business.
Our business would be adversely affected by the departure of existing members of our senior management team or if our senior management team is unable to effectively implement our strategy.
Our success depends, in large part, on the continued contributions of our senior management team, none of whom is bound by a written employment contract to remain with us for a specified period. The loss of any of our senior management could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate.
Uncertainties involving the ordering and shipment of, and payment for, our products could adversely affect our business.
Our sales are made pursuant to standard purchase orders and/or specified customer contracts for delivery of products and not under long-term supply arrangements with our customers. Our customers may cancel orders before shipment. Additionally, we sell a portion of our products through distributors, some of whom have rights to return unsold products if the product is defective. We may purchase and manufacture inventory based on estimates of customer demand for our products, which is difficult to predict. This difficulty may be compounded when we sell to OEMs indirectly through distributors or contract manufacturers, or both, as our forecasts of demand will then be based on estimates provided by multiple parties. In addition, our customers may change their inventory practices on short notice for any reason. The cancellation or deferral of product orders, the return of previously sold products, or overproduction due to a change in anticipated order volumes could result in us holding excess or obsolete inventory, which could result in inventory write-downs and, in turn, could have a material adverse effect on our financial condition.
In addition, if a customer encounters financial difficulties of its own as a result of a change in demand or for any other reason, the customer’s ability to make timely payments against our accounts receivable could be impaired.
We may be subject to claims of infringement of third-party intellectual property rights, or demands that we license third-party technology, which could result in significant expense and prevent us from using our technology.
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 may not 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:
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• | pay substantial damages, |
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• | cease the manufacture, import, use, sale or offer for sale of infringing products or processes, |
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• | discontinue the use of infringing technology, |
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• | expend significant resources to develop non-infringing technology, and |
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• | license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms. |
Our operating results or financial condition may be materially adversely affected if we, or one of our customers, were required to take any one or more of the foregoing actions.
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.
Many of our products currently incorporate technology licensed or acquired from third parties and we expect our products in the future to also require technology from third parties. If the licenses to such technology that we currently hold become unavailable or the terms on which they are available become commercially unreasonable, or if we are unable to acquire or license necessary technology for our products in the future, our business could be adversely affected.
We sell products in markets that are characterized by rapid technological changes, evolving industry standards, frequent new product introductions, short product life cycles and increasing levels of integration. Our ability to keep pace with this market depends on our ability to obtain technology from third parties on commercially reasonable terms to allow our products to remain competitive. If licenses to such technology are not available on commercially reasonable terms and conditions or at all, and we cannot otherwise acquire or integrate such technology, our products or our customers’ products could become unmarketable or obsolete, and we could lose market share. In such instances, we could also incur substantial unanticipated costs or scheduling delays to develop substitute technology to deliver competitive products.
If we are not successful in protecting our intellectual property rights, our ability to compete successfully may be materially and adversely affected.
We rely on patent, copyright, trademark, trade secret and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary technologies, information, data, devices, algorithms, processes and other intellectual property. In addition, we often incorporate the intellectual property of our customers, suppliers or other third parties into our designs, and we have obligations with respect to the non-use and non-disclosure of such third-party intellectual property. In the future, it may be necessary to engage in litigation or like activities to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. This could require us to expend significant resources and to divert the efforts and attention of our management and technical personnel from our business operations. Regardless of our actions:
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• | the steps we take to prevent misappropriation, infringement, dilution or other violation of our intellectual property or the intellectual property of our customers, suppliers or other third parties may not be successful, and |
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• | any of our existing or future patents, copyrights, trademarks, trade secrets or other intellectual property rights may be challenged, invalidated or circumvented. |
Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization, develop similar technology independently or design around our patents. If any of our intellectual property protection mechanisms fails to protect our technology, it would make it easier for our competitors to offer similar products, potentially resulting in loss of market share and price erosion. Even if we receive a patent, the patent claims may not be broad enough to adequately protect our technology. Furthermore, even if we receive patent protection in the United States, we may not seek, or may not be granted, patent protection in foreign countries. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited for certain technologies and in certain foreign countries.
We attempt to control access to and distribution of our proprietary information through operational, technological and legal safeguards. Despite our efforts, parties, including former or current employees, may attempt to copy, disclose or obtain access to our information without our authorization. Furthermore, attempts by computer hackers to gain unauthorized access to our systems or information could result in our proprietary information being compromised or in our operations being interrupted. While we attempt to prevent such unauthorized access we may be unable to anticipate the methods used, or be unable to prevent the release of our proprietary information.
We are subject to the risks of doing business internationally.
A substantial majority of our net revenue is derived from customers located outside the United States, primarily in countries located in the Asia-Pacific region and Europe. In addition, we have suppliers located outside the United States, and third-party packaging, assembly and test facilities and foundries located in the Asia-Pacific region. Finally, we maintain wafer fabrication facilities in
Kadoma, Japan and Osaka, Japan, as well as packaging, assembly and test facilities in Mexicali, Mexico and in Singapore. Our international sales and operations are subject to a number of risks inherent in selling and operating abroad. These include, but are not limited to, risks regarding:
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• | currency exchange rate fluctuations, including increases or decreases in commodities prices related to such fluctuations, |
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• | local economic and political conditions, including social, economic and political instability, |
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• | labor market conditions and workers’ rights, |
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• | disruptions of capital and trading markets, |
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• | inability to collect accounts receivable, |
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• | restrictive governmental actions (such as restrictions on transfer of funds and trade protection measures, including export duties, quotas, customs duties, increased import or export controls and tariffs), |
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• | changes in, or non-compliance with, legal or regulatory import/export requirements, |
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• | natural disasters, acts of terrorism, widespread illness and war, |
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• | difficulty in obtaining distribution and support, |
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• | cultural differences in the conduct of business, |
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• | direct or indirect government actions or policies aimed at supporting local industry, |
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• | the laws and policies of the United States and other countries affecting trade, foreign investment and loans, and import or export licensing requirements, |
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• | changes in current or future tax law or regulations or new interpretations thereof, by federal or state agencies or foreign governments (including changes proposed in certain countries in Europe and elsewhere regarding corporate taxes, transfer pricing, and tax treaty provisions), |
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• | changes in the effective tax rate as a result of our overall profitability and mix of earnings in countries with differing statutory tax rates, |
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• | results of audits and examination of previously filed tax returns, |
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• | the possibility of being exposed to legal proceedings in a foreign jurisdiction given the numerous, and sometimes conflicting, legal regimes on matters as diverse as anti-corruption, import/export controls, content requirements, trade restrictions, tariffs, taxation, sanctions, immigration, internal and disclosure control obligations, securities regulation, anti-competition, data privacy and protection, employment and labor relations, |
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• | limitations on our ability under local laws to protect or enforce our intellectual property rights in a particular foreign jurisdiction, and |
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• | restrictions on our ability to repatriate foreign earnings and / or funds and the unfavorable tax impactions related to the same. |
Additionally, we are subject to risks in certain global markets in which wireless operators provide subsidies on handset sales to their customers. Increases in cellular handset prices that negatively impact handset sales can result from changes in regulatory policies or other factors, which could impact the demand for our products. Limitations or changes in policy on phone subsidies in the United States, South Korea, Japan, China and other countries may have additional negative impacts on our revenues.
Some of the countries in which we operate and seek to expand are in emerging markets where legal systems may be less developed or familiar to us. Compliance with diverse legal requirements is costly and time-consuming and requires significant resources. Violations of one or more of these regulations in the conduct of our business could result in significant fines or monetary damages, criminal sanctions against us or our officers, prohibitions on doing business, unfavorable publicity and other reputation damage, restrictions on our ability to process information and allegations by our clients that we have not performed our contractual obligations.
We are particularly exposed to risks of doing business in China. We expect to continue to expand our business and operations in China. Our success in the Chinese markets may be adversely affected by China’s continuously evolving laws and regulations, including those relating to taxation, import and export tariffs, currency controls, anti-corruption, environmental regulations, indigenous innovation, and intellectual property rights and enforcement of those rights. Enforcement of existing laws or agreements may be inconsistent. In addition, changes in the political environment, governmental policies or United States-China relations could result in revisions to laws or regulations or their interpretation and enforcement, exposure of our proprietary intellectual property, increased
taxation, restrictions on imports, import duties or currency revaluations, which could have an adverse effect on our business plans and operating results. Further, the evolving labor market and increasing labor unrest in China may have a negative impact on our customers, which would result in a negative impact on our business and results of operations.
Changes in tax regulations and changes in the favorable tax status of our subsidiary in Singapore could have an adverse impact on our operating results.
We are subject to taxation in many different countries and localities worldwide. To the extent the tax laws and regulations in these various countries and localities could change, our tax liability in general could increase. For example, our subsidiary in Singapore receives a tax holiday that is expected to be effective through September 2020. Changes in the status of this tax holiday could have a negative effect on our net income in future years.
We face a risk that capital needed for our business will not be available when we need it.
To the extent that our existing cash and cash equivalents and cash generated from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. If unfavorable capital market conditions exist in the event we were to seek additional financing, we may not be able to raise sufficient capital on favorable terms and on a timely basis, if at all. Failure to obtain capital when required by our business circumstances would have a material adverse effect on us.
In addition, any strategic investments and acquisitions that we may make to help us grow our business may require additional capital resources. The capital required to fund these investments and acquisitions may not be available in the future.
To be successful we may need to make certain investments and acquisitions, integrate companies we acquire, and/or enter into strategic alliances.
Although we have invested in the past, and intend to continue to invest, significant resources in internal research and development activities, the complexity and rapidity of technological changes and the significant expense of internal research and development make it impractical for us to pursue development of all technological solutions on our own. On an ongoing basis, we review investment, alliance and acquisition prospects that would complement our product offerings, augment our market coverage or enhance our technological capabilities. We may not be able to identify and consummate suitable investment, alliance or acquisition transactions in the future. Moreover, if such transactions are consummated, they could result in:
| |
• | issuances of equity securities dilutive to our stockholders, |
| |
• | large, transactions, restructuring or other impairment write-offs, |
| |
• | the incurrence of substantial debt and assumption of unknown liabilities, |
| |
• | the potential loss of key employees from the acquired company, |
| |
• | recognition of additional liabilities known or unknown at the time of acquisition, |
| |
• | amortization expenses related to intangible assets, and |
| |
• | the diversion of management’s attention from other business concerns. |
Moreover, integrating acquired organizations and their products and services may be difficult, expensive, time-consuming and a strain on our resources and our relationship with employees and customers and ultimately may not be successful. Additionally, in periods following an acquisition, we will be required to evaluate goodwill and acquisition-related intangible assets for impairment. If such assets are found to be impaired, they will be written down to estimated fair value, with a charge against earnings.
Increasingly stringent environmental laws, rules and regulations may require us to redesign our existing products and processes, and could adversely affect our ability to cost-effectively produce our products.
The semiconductor industry has been subject to increasing environmental regulations, particularly those environmental requirements that control and restrict the use, transportation, emission, discharge, storage and disposal of certain chemicals, elements and materials used or produced in the semiconductor manufacturing process. Heightened public focus on sustainability and environmental issues has also led to increased government regulation and caused certain of our customers to impose environmental standards on us as a part of doing business with them. We expect that the trend of increasing environmental awareness will continue for the foreseeable future which will result in higher costs of operations. In addition, our commitment to environmentally sustainable practices, while undertaken in a manner designed to be as efficient and cost effective as possible, may result increases in costs of operations for us relative to our competitors until technologies and methods are developed that will help reduce those costs or such practices become industry best practice.
A number of domestic and foreign jurisdictions seek to restrict the use of various substances, a number of which have been or are currently used in our products or processes. For example, the European Union Restriction of Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) Directive now requires that certain substances, which may be found in certain products we have manufactured in the past, be removed from all electronics components. Eliminating such substances from our manufacturing processes requires the expenditure of additional research and development funds to seek alternative substances for our products, as well as increased testing by third parties to ensure the quality of our products and compliance with the RoHS Directive. While we have implemented a compliance program to ensure our product offering meets these regulations, there may be instances where alternative substances will not be available or commercially feasible, or may only be available from a single source, or may be significantly more expensive than their restricted counterparts. Additionally, if we were found to be non-compliant with any such rule or regulation, we could be subject to fines, penalties and/or restrictions imposed by government agencies that could adversely affect our operating results.
Regulations in the United States require that we determine whether certain materials used in our products, referred to as conflict minerals, originated in the Democratic Republic of the Congo or adjoining countries, or were from recycled or scrap sources. The verification and reporting requirements, in addition to customer demands for conflict-free sourcing, impose additional costs on us and on our suppliers, and may limit the sources or increase the prices of materials used in our products. Further, if we are unable to certify that our products are conflict free, we may face challenges with our customers, which could place us at a competitive disadvantage, and our reputation may be harmed.
New climate change laws and regulations could require us to change our manufacturing processes or obtain substitute materials that may cost more or be less available for our manufacturing operations. In addition, new restrictions on emissions of carbon dioxide or other greenhouse gases could result in significant costs for us. The Commonwealth of Massachusetts has adopted greenhouse gas regulations, and the United States Congress may pass federal greenhouse gas legislation in the future. The United States Environmental Protection Agency (“EPA”) has issued greenhouse gas reporting regulations that may apply to certain of our operations. The EPA is developing other climate change-based regulations, as are certain states, that also may increase our expenses and adversely affect our operating results. We expect increased worldwide regulatory activity relating to climate change in the future. Compliance with these laws and regulations has not had a material impact on our capital expenditures, earnings, financial condition or competitive position.
Furthermore, environmental regulations often require parties to fund remedial action for violations of such regulations regardless of fault. Consequently, it is often difficult to estimate the future impact of environmental matters, including potential liabilities. In addition, our customers increasingly require warranties or indemnity relating to compliance with environmental regulations. The amount of expense and capital expenditures that might be required to satisfy environmental liabilities, to complete remedial actions and to continue to comply with applicable environmental laws may have a material adverse effect on our business, financial condition and results of operations.
Certain provisions in our organizational documents and Delaware law may make it difficult for someone to acquire control of us.
We have certain anti-takeover measures that may affect our common stock. Our certificate of incorporation, our by-laws and the Delaware General Corporation Law contain several provisions that would make more difficult an acquisition of control of us in a transaction not approved by our Board of Directors. Our certificate of incorporation and by-laws include provisions such as:
| |
• | the ability of our Board of Directors to issue shares of preferred stock in one or more series without further authorization of stockholders, |
| |
• | a prohibition on stockholder action by written consent, |
| |
• | no stockholder right to call a special meeting of stockholders, |
| |
• | a requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders, |
| |
• | a requirement that the affirmative vote of at least 80% of our shares be obtained to amend or repeal the provisions of our certificate of incorporation relating to the election and removal of directors or the right to act by written consent, |
| |
• | a requirement that the affirmative vote of at least 80% of our shares be obtained for business combinations unless approved by a majority of the members of the Board of Directors and, in the event that the other party to the business combination is the beneficial owner of 5% or more of our shares, a majority of the members of Board of Directors in office prior to the time such other party became the beneficial owner of 5% or more of our shares, |
| |
• | a fair price provision, and |
| |
• | a requirement that the affirmative vote of at least 90% of our shares be obtained to amend or repeal the fair price provision. |
In addition to the provisions in our certificate of incorporation and by-laws, Section 203 of the Delaware General Corporation Law generally provides that a corporation may not engage in any business combination with any interested stockholder during the three-year period following the time that such stockholder becomes an interested stockholder, unless a majority of the directors then in office approves either the business combination or the transaction that results in the stockholder becoming an interested stockholder or specified stockholder approval requirements are met.
Our business and operations could suffer in the event of security breaches.
Attempts by others to gain unauthorized access to our information technology systems are becoming more sophisticated and are sometimes successful. These attempts, which might be related to industrial or other espionage, include covertly introducing malware to our computers and networks and impersonating authorized users, among others. We seek to detect and investigate all security incidents and to prevent their recurrence, but in some cases, we might be unaware of an incident or its magnitude and effects. The theft, unauthorized use or publication of our intellectual property and/or confidential business information by third parties or by our employees could harm our competitive position, reduce the value of our investment in research and development and other strategic initiatives or otherwise adversely affect our business. To the extent that any security breach results in inappropriate disclosure of our customers’ or licensees’ confidential information, we may incur liability as a result. In addition, we expect to devote significant resources to the security of our information technology systems.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We have executive offices in Irvine, California, and Woburn, Massachusetts. For information regarding property, plant and equipment by geographic region for each of the last three fiscal years, see Note 16 to Item 8 of this Annual Report on Form 10-K. The following table sets forth our principal facilities: |
| | | | | | |
Location | | Owned/Leased | |
Square Footage | | Primary Function |
Mexicali, Mexico | | Owned | | 380,000 | | Manufacturing and office space |
Woburn, Massachusetts | | Owned | | 158,000 | | Manufacturing and office space |
Adamstown, Maryland | | Owned | | 121,200 | | Manufacturing and office space |
Newbury Park, California | | Owned | | 111,600 | | Manufacturing and office space |
Osaka, Japan | | Leased | | 405,400 | | Filter manufacturing |
Mexicali, Mexico | | Leased | | 178,000 | | Manufacturing and office space |
Singapore, Singapore | | Leased | | 176,800 | | Filter manufacturing |
Irvine, California | | Leased | | 126,900 | | Design center and office space |
Newbury Park, California | | Leased | | 114,100 | | Design center |
Kadoma, Japan | | Leased | | 103,300 | | Filter manufacturing and office space |
San Jose, California | | Leased | | 49,800 | | Design center |
Cedar Rapids, Iowa | | Leased | | 42,900 | | Design center |
Ottawa, Ontario | | Leased | | 33,200 | | Design center |
Andover, Massachusetts | | Leased | | 22,900 | | Design center |
Seoul, Korea | | Leased | | 22,900 | | Design center |
ITEM 3. LEGAL PROCEEDINGS.
The information set forth under Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION AND DIVIDENDS
Our common stock is traded on the NASDAQ Global Select Market under the symbol “SWKS”. The following table sets forth the range of high and low closing prices for our common stock, as reported by NASDAQ, and the cash dividends announced per share of common stock for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 |
| High | | Low | | Dividends | | High | | Low | | Dividends |
First quarter | $ | 87.92 |
| | $ | 74.63 |
| | $ | 0.26 |
| | $ | 74.49 |
| | $ | 45.32 |
| | $ | 0.13 |
|
Second quarter | $ | 78.18 |
| | $ | 55.85 |
| | $ | 0.26 |
| | $ | 102.05 |
| | $ | 69.83 |
| | $ | 0.13 |
|
Third quarter | $ | 78.21 |
| | $ | 58.01 |
| | $ | 0.26 |
| | $ | 110.92 |
| | $ | 92.25 |
| | $ | 0.13 |
|
Fourth quarter | $ | 77.02 |
| | $ | 58.82 |
| | $ | 0.28 |
| | $ | 103.97 |
| | $ | 79.07 |
| | $ | 0.26 |
|
The number of stockholders of record of our common stock as of November 14, 2016 was 19,882. On November 3, 2016, the Board of Directors declared a cash dividend of $0.28 per share of common stock, payable on December 8, 2016, to stockholders of record as of November 17, 2016. We intend to continue to pay quarterly dividends subject to capital availability and our view that cash dividends are in the best interests of our stockholders. Future dividends may be affected by, among other items, our views on potential future capital requirements, including those relating to research and development, creation and expansion of sales distribution channels and investments and acquisitions, legal risks, stock repurchase programs, debt issuance, changes in federal and state income tax law and changes to our business model.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides information regarding repurchases of common stock made during the fiscal quarter ended September 30, 2016:
|
| | | | |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number (or Approximately Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
7/02/16-7/29/16 | 751,023(2) (3) | $65.09 | 750,000 | $351.2 million |
7/30/16-8/26/16 | 1,601,858(2) (4) | $66.15 | 1,600,732 | $245.3 million |
8/27/16-9/30/16 | 652,146(2) (5) | $67.62 | 650,000 | $201.4 million |
Total | 3,005,027 |
| 3,000,732 | |
_________________________
(1)The stock repurchase program approved by the Board of Directors on July 19, 2016, authorizes the repurchase of up to $400.0 million of our common stock from time to time on the open market or in privately negotiated transactions as permitted by securities laws and other legal requirements. The share repurchase program is scheduled to expire on July 19, 2018.
(2) Represents shares repurchased by us at the fair market value of the common stock as of the applicable purchase date, in connection with the satisfaction of tax withholding obligations under restricted stock agreements.
(3) 750,000 shares were repurchased at an average price of $65.09 per share as part of our stock repurchase program and 1,023 shares were withheld for tax obligations under restricted stock agreements with an average price of $65.23.
(4) 1,600,732 shares were repurchased at an average price of $66.15 per share as part of our stock repurchase program and 1,126 shares were withheld for tax obligations under restricted stock agreements with an average price of $68.72.
(5) 650,000 shares were repurchased at an average price of $67.59 per share as part of our stock repurchase program and 2,146 shares were withheld for tax obligations under restricted stock agreements with an average price of $75.65.
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth below for the five years ended September 30, 2016, is not necessarily indicative of results of future operations, and should be read in conjunction with Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and our consolidated financial statements and related notes included in Part II, Item 8 of this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below. Our fiscal year ends on the Friday closest to September 30. Fiscal 2016, 2015, 2013, and 2012 each consisted of 52 weeks and ended on September 30, 2016, October 2, 2015, September 27, 2013, and September 28, 2012, respectively. Fiscal 2014 consisted of 53 weeks and ended on October 3, 2014.
The following table represents the selected financial data (in millions, except per share data):
|
| | | | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
Statement of Operations Data: | September 30, 2016 (1) | | October 2,
2015 | | October 3,
2014 | | September 27,
2013 | | September 28,
2012 |
Net revenue | $ | 3,289.0 |
| | $ | 3,258.4 |
| | $ | 2,291.5 |
| | $ | 1,792.0 |
| | $ | 1,568.6 |
|
Operating income | $ | 1,118.7 |
| | $ | 1,023.1 |
| | $ | 565.2 |
| | $ | 345.1 |
| | $ | 255.6 |
|
Operating margin | 34.0 | % | | 31.4 | % | | 24.7 | % | | 19.3 | % | | 16.3 | % |
Net income | $ | 995.2 |
| | $ | 798.3 |
| | $ | 457.7 |
| | $ | 278.1 |
| | $ | 202.0 |
|
Earnings per share: | | | | | | | | | |
Basic | $ | 5.27 |
| | $ | 4.21 |
| | $ | 2.44 |
| | $ | 1.48 |
| | $ | 1.09 |
|
Diluted | $ | 5.18 |
| | $ | 4.10 |
| | $ | 2.38 |
| | $ | 1.45 |
| | $ | 1.05 |
|
Cash dividends declared per share | $ | 1.06 |
| | $ | 0.65 |
| | $ | 0.22 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | |
| As of |
Balance Sheet Data: | September 30, 2016 (1) | | October 2,
2015 | | October 3,
2014 | | September 27,
2013 | | September 28,
2012 |
Working capital | $ | 1,791.9 |
| | $ | 1,450.8 |
| | $ | 1,131.6 |
| | $ | 893.6 |
| | $ | 700.6 |
|
Property, plant and equipment, net | $ | 806.3 |
| | $ | 826.4 |
| | $ | 555.9 |
| | $ | 328.6 |
| | $ | 279.4 |
|
Total assets | $ | 3,855.4 |
| | $ | 3,719.4 |
| | $ | 2,973.8 |
| | $ | 2,333.1 |
| | $ | 2,136.6 |
|
Stockholders’ equity | $ | 3,541.4 |
| | $ | 3,159.2 |
| | $ | 2,532.4 |
| | $ | 2,101.1 |
| | $ | 1,905.5 |
|
____________
(1) Fiscal 2016 net income and earnings per share include other income of $88.5 million related to the receipt of the PMC-Sierra merger termination fee.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially and adversely from those referred to herein due to a number of factors, including, but not limited to, those described below and in Item 1A “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
OVERVIEW
We, together with our consolidated subsidiaries, are empowering the wireless networking revolution. Our highly innovative analog semiconductors are connecting people, places, and things spanning a number of new and previously unimagined applications within the automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and wearable markets. Our key customers include Arris, Bose, Cisco, Dell, Ericsson, Foxconn, Fujitsu, General Electric, Google, Honeywell, HTC, Huawei, Landis & Gyr, Lenovo, LG Electronics, Microsoft, Nest, Netgear, Northrop Grumman, OPPO, Rockwell Collins, Samsung, Sonos, VIVO, and ZTE. Our competitors include Analog Devices, Broadcom, Maxim Integrated Products, Murata Manufacturing, NXP Semiconductors, QUALCOMM, and Qorvo.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, 2016, OCTOBER 2, 2015, AND OCTOBER 3, 2014.
The following table sets forth the results of our operations expressed as a percentage of net revenue:
|
| | | | | | | | |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Net revenue | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of goods sold | 49.4 |
| | 52.3 |
| | 55.4 |
|
Gross profit | 50.6 |
| | 47.7 |
| | 44.6 |
|
Operating expenses: | | | | | |
Research and development | 9.5 |
| | 9.3 |
| | 11.0 |
|
Selling, general and administrative | 6.0 |
| | 5.9 |
| | 7.8 |
|
Amortization of intangibles | 1.0 |
| | 1.0 |
| | 1.1 |
|
Restructuring and other charges | 0.1 |
| | 0.1 |
| | — |
|
Total operating expenses | 16.6 |
| | 16.3 |
| | 19.9 |
|
Operating income | 34.0 |
| | 31.4 |
| | 24.7 |
|
Other (expense) income, net | (0.2 | ) | | — |
| | — |
|
Merger termination fee | 2.7 |
| | — |
| | — |
|
Income before income taxes | 36.5 |
| | 31.4 |
| | 24.7 |
|
Provision for income taxes | 6.2 |
| | 6.9 |
| | 4.7 |
|
Net income | 30.3 | % | | 24.5 | % | | 20.0 | % |
GENERAL
During the fiscal year ended September 30, 2016, the following key factors contributed to our overall results of operations, financial position and cash flows:
| |
• | Net revenue increased to approximately $3.3 billion, an increase of 1% as compared to the prior fiscal year. This increase in revenue was primarily related to our continued growth as smartphones displace traditional cellular phones, increased strength in emerging markets due to the adoption of 3G and 4G technologies, increases in applications for the Internet of Things, and the expansion of our analog product portfolio to address additional content within the handset and tablet markets as well as new vertical markets including automotive, industrial, medical and military, partially offset by decreased end-market demand for certain smartphone models. |
| |
• | Our ending cash and cash equivalents balance increased 4% to approximately $1,084 million in fiscal 2016 from $1,044 million in fiscal 2015. This was the result of an approximately 10% increase in cash from operations to $1,096 million in fiscal 2016 from $993 million in fiscal 2015 due to higher net income, partially offset by changes in working capital. In addition, we returned approximately $726 million to shareholders through repurchasing eight million shares of our common stock for $526 million together with payments of $201 million in cash dividends. Lastly, we invested approximately $189 million in capital expenditures and $132 million related to business acquisition activity during the fiscal year. |
NET REVENUE
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | Change | October 2,
2015 | Change | October 3,
2014 |
(dollars in millions) | | | | | |
Net revenue | $ | 3,289.0 |
| 0.9% | $ | 3,258.4 |
| 42.2% | $ | 2,291.5 |
|
We market and sell our products directly to OEMs of communications and electronics products, third-party original design manufacturers and contract manufacturers, and indirectly through electronic components distributors. We generally experience seasonal peaks during the second half of the calendar year, primarily as a result of increased worldwide production of consumer electronics in anticipation of increased holiday sales, whereas our second fiscal quarter is typically lower and in line with seasonal industry trends.
The $30.6 million increase in revenue in fiscal 2016 as compared to fiscal 2015 was primarily driven by our ability to capture a higher share of the increasing RF and analog content per device as smartphones continue to displace traditional cellular phones, increased strength in emerging markets due to the adoption of 3G and 4G technologies, the increasing number of applications for the Internet of Things, and our expanding analog product portfolio supporting new vertical markets including automotive, industrial, medical and military. These increases were partially offset due to a decrease in demand during fiscal 2016 for our components from a key smartphone customer as a result of a decline in overall market demand for certain products.
The $966.9 million increase in revenue in fiscal 2015 as compared to fiscal 2014 was primarily driven by our ability to capture a higher share of the increasing RF and analog content per device due to more complex smartphones continuing to displace traditional cellular phones, increased strength in emerging markets due to the adoption of 3G and 4G technologies, the increasing popularity of tablet computing and wearables, and our expanding analog product portfolio supporting new vertical markets including automotive, industrial, medical and military.
For information regarding net revenue by geographic region and customer concentration, see Note 16 of Item 8 of this Annual Report on Form 10-K.
GROSS PROFIT
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | Change | October 2,
2015 | Change | October 3,
2014 |
(dollars in millions) | | | | | |
Gross profit | $ | 1,665.2 |
| 7.1% | $ | 1,554.5 |
| 52.0% | $ | 1,022.7 |
|
% of net revenue | 50.6 | % | | 47.7 | % | | 44.6 | % |
Gross profit represents net revenue less cost of goods sold. Our cost of goods sold consists primarily of purchased materials, labor and overhead (including depreciation and share-based compensation expense) associated with product manufacturing. Erosion of average selling prices of established products is typical of the semiconductor industry. Consistent with trends in the industry, we anticipate that average selling prices for our established products will continue to decline at a normalized rate of five to ten percent per year. As part of our normal course of business, we mitigate the gross margin impact of declining average selling prices with efforts to increase unit volumes, reduce material costs, improve manufacturing efficiencies, lower manufacturing costs of existing products and by introducing new and higher value-added products.
Gross profit was $110.7 million greater in fiscal 2016 as compared to fiscal 2015. The increase in gross profit was primarily the result of higher unit volumes and lower overall per-unit material and manufacturing costs, with an aggregate gross profit benefit of $177.4
million. These benefits were partially offset by the erosion of average selling price and changes in product mix that combined to negatively impact gross profit by $66.7 million. As a result of these impacts, gross profit margin increased to 50.6% of net revenue for fiscal 2016.
Gross profit was $531.8 million greater in fiscal 2015 as compared to fiscal 2014. The increase in gross profit was primarily the result of higher unit volumes, lower overall per-unit material and manufacturing costs with an aggregate gross profit benefit of $687.8 million. These benefits were partially offset by the erosion of average selling price, unfavorable changes in product mix and other costs that combined to negatively impact gross profit by $156.0 million. As a result of these impacts, gross profit margin increased to 47.7% of net revenue for fiscal 2015.
RESEARCH AND DEVELOPMENT
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | Change | October 2,
2015 | Change | October 3,
2014 |
(dollars in millions) | | | | | |
Research and development | $ | 312.4 |
| 3.0% | $ | 303.2 |
| 20.2% | $ | 252.2 |
|
% of net revenue | 9.5 | % | | 9.3 | % | | 11.0 | % |
Research and development expenses consist primarily of direct personnel costs including share-based compensation expense, costs for pre-production evaluation and testing of new devices, masks, engineering prototypes and design tool costs.
The increase in research and development expense in fiscal 2016 as compared to fiscal 2015 is primarily related to increased product development-related expenses partially offset by a decrease in variable compensation expense, including share-based compensation. Research and development expense increased slightly as a percentage of net revenue due to the aforementioned factors.
The increase in research and development expense in fiscal 2015 as compared to fiscal 2014 is primarily related to increased employee compensation expense, including share-based compensation, of approximately $26.7 million and increased product development and other related expenses of approximately $24.3 million. Research and development expense decreased as a percentage of net revenue due to the aforementioned increase in net revenue.
SELLING, GENERAL AND ADMINISTRATIVE
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | Change | October 2,
2015 | Change | October 3,
2014 |
(dollars in millions) | | | | | |
Selling, general and administrative | $ | 195.9 |
| 2.4% | $ | 191.3 |
| 6.8% | $ | 179.1 |
|
% of net revenue | 6.0 | % | | 5.9 | % | | 7.8 | % |
Selling, general and administrative expenses include legal and related costs, accounting, treasury, human resources, information systems, customer service, bad debt expense, sales commissions, share-based compensation expense, advertising, marketing, costs associated with business combinations completed or contemplated during the period or prior periods and other costs.
The increase in selling, general and administrative expenses in fiscal 2016 as compared to fiscal 2015 was primarily related to legal and related costs and professional services costs incurred during the period, partially offset by decreased variable compensation expense, including share-based compensation. Selling, general and administrative expenses increased slightly as a percentage of net revenue due to the aforementioned factors.
The increase in selling, general and administrative expenses in fiscal 2015 as compared to fiscal 2014 was primarily related to increased compensation expense, including share-based compensation, and legal expenses related to acquisitions completed and contemplated during the period. Selling, general and administrative expenses decreased as a percentage of net revenue due to the aforementioned increase in net revenue.
AMORTIZATION OF INTANGIBLES
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | Change | October 2,
2015 | Change | October 3,
2014 |
(dollars in millions) | | | | | |
Amortization of intangibles | $ | 33.4 |
| (0.3)% | $ | 33.5 |
| 29.3% | $ | 25.9 |
|
% of net revenue | 1.0 | % | | 1.0 | % | | 1.1 | % |
Amortization expense for fiscal 2016 is the result of intangible assets acquired during fiscal 2016, partially offset by the end of the estimated useful lives of certain fully amortized intangible assets that were acquired in prior fiscal years.
The increase in amortization expense for fiscal 2015 as compared to fiscal 2014 was primarily due to the intangible assets that were acquired in fiscal 2015 and fiscal 2014, partially offset by the end of the estimated useful lives of certain fully amortized intangible assets that were acquired in prior fiscal years.
RESTRUCTURING AND OTHER CHARGES
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | Change | October 2,
2015 | Change | October 3,
2014 |
(dollars in millions) | | | | | |
Restructuring and other charges | $ | 4.8 |
| 41.2% | $ | 3.4 |
| 1,033.3% | $ | 0.3 |
|
% of net revenue | 0.1 | % | | 0.1 | % | | — | % |
Restructuring and other charges incurred in fiscal 2016 are primarily related to restructuring plans to reduce redundancies associated with the acquisitions made during fiscal 2016. We do not anticipate any further significant charges associated with these restructuring activities and substantially all of the remaining cash payments related to these restructuring plans are expected to occur during the next fiscal year.
Restructuring and other charges incurred in fiscal 2015 are primarily related to severance costs associated with restructuring plans initiated during fiscal 2015.
MERGER TERMINATION FEE
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | Change | October 2,
2015 | Change | October 3,
2014 |
(dollars in millions) | | | | | |
Merger termination fee | $ | 88.5 |
| 100.0% | $ | — |
| —% | $ | — |
|
% of net revenue | 2.7 | % | | — | % | | — | % |
On October 29, 2015, we entered into an Amended and Restated Agreement and Plan of Merger (the “Merger Agreement”) with PMC-Sierra, Inc. (“PMC”), providing for, subject to the terms and conditions of the Merger Agreement, our cash acquisition of PMC. On November 23, 2015, PMC notified us that it had terminated the Merger Agreement. As a result, on November 24, 2015, PMC paid us a termination fee of $88.5 million pursuant to the Merger Agreement.
PROVISION FOR INCOME TAXES
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | Change | October 2,
2015 | Change | October 3,
2014 |
(dollars in millions) | | | | | |
Provision for income taxes | $ | 205.4 |
| (8.8)% | $ | 225.3 |
| 109.6% | $ | 107.5 |
|
% of net revenue | 6.2 | % | | 6.9 | % | | 4.7 | % |
The annual effective tax rate for fiscal 2016 of 17.1% was less than the United States federal statutory rate of 35% primarily due to benefits of 13.7% related to foreign earnings taxed at a rate less than the United States federal rate, 1.6% related to a domestic production activities deduction, 2.8% related to the recognition of federal research and development tax credits, and 1.8% from the settlement of the Internal Revenue Service (“IRS”) audit of our fiscal 2012 and 2013 income tax returns, partially offset by income tax rate expense impact of 1.6% related to a change in our tax reserves.
During fiscal 2016, we concluded an IRS examination of our federal income tax returns for fiscal years 2012 and 2013. We agreed to various adjustments to our fiscal year 2012 and 2013 tax returns that resulted in the recognition of current year tax expense of $2.6 million during fiscal 2016. With the conclusion of the audit, we decreased the reserve for uncertain tax positions, which resulted in the recognition of an income tax benefit of $24.0 million in fiscal 2016.
We operate under a tax holiday in Singapore, which is effective through September 30, 2020. This tax holiday is conditioned upon our compliance with certain employment and investment thresholds in Singapore. The impact of the tax holiday decreased the taxes we owe in Singapore by $30.8 million and $26.6 million for fiscal 2016 and fiscal 2015, respectively. This resulted in tax benefits of $0.16 and $0.14 of diluted earnings per share for fiscal 2016 and fiscal 2015, respectively.
The annual effective tax rate for fiscal 2015 of 22.0% was less than the United States federal statutory rate of 35% primarily due to benefits of 11.8% related to foreign earnings taxed at a rate less than the United States federal rate, 1.9% related to a domestic production activities deduction, and 1.5% related to the recognition of federal research and development tax credits, partially offset by income tax rate expense impact of 2.5% related to a change in our tax reserves.
LIQUIDITY AND CAPITAL RESOURCES
|
| | | | | | | | | | | |
| Fiscal Years Ended |
(in millions) | September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Cash and cash equivalents at beginning of period | $ | 1,043.6 |
| | $ | 805.8 |
| | $ | 511.1 |
|
Net cash provided by operating activities | 1,095.7 |
| | 992.8 |
| | 772.4 |
|
Net cash used in investing activities | (250.9 | ) | | (454.7 | ) | | (357.1 | ) |
Net cash used in financing activities | (804.6 | ) | | (300.3 | ) | | (120.6 | ) |
Cash and cash equivalents at end of period | $ | 1,083.8 |
| | $ | 1,043.6 |
| | $ | 805.8 |
|
Cash flow provided by operating activities:
Cash flow provided by operating activities consists of net income for the period adjusted for certain non-cash items and changes in certain operating assets and liabilities. For fiscal 2016, we generated $1,095.7 million in cash flow from operations, an increase of $102.9 million when compared to $992.8 million generated in fiscal 2015. The increase in cash flow from operating activities during the fiscal year ended September 30, 2016, was related to higher net income combined with a net cash inflow from changes in operating assets and liabilities. Specifically, the changes in operating assets and liabilities that were sources of cash were: $121.4 million in accounts receivable due to the timing of customer collections and $27.9 million primarily related to tax liabilities, payroll related accruals and other accrued expenses. These sources of cash were offset by uses of cash of: $181.5 million in accounts payable related to the timing of vendor payments, $147.3 million related to increased inventory primarily resulting from the insourcing and ramp of our filter business, and $20.4 million related to changes in other current and long-term assets.
Cash flow used in investing activities:
Cash flow used in investing activities consists primarily of capital expenditures and cash paid for acquisitions, net of cash acquired. Cash flow used in investing activities was $250.9 million during fiscal 2016, compared to $454.7 million during fiscal 2015. The decrease was primarily related to the prior year’s expansion of our assembly and test facility in Mexicali, Mexico and the construction of a new filter fabrication facility in Osaka, Japan. Capital expenditures in fiscal 2016 primarily relate to the continuation of the aforementioned expansions of the facilities in Mexico and Japan, and to a lesser extent, to our wafer fabrication facilities in the United States. In addition, we paid $55.6 million in cash to complete two acquisitions and paid cash of $6.0 million to acquire intangible assets during the fiscal year.
Cash flow used in financing activities:
Cash flow used in financing activities consists primarily of cash transactions related to debt and equity. During fiscal 2016, we had net cash outflows of $804.6 million, compared to $300.3 million in fiscal 2015. The increase in cash used in financing activities primarily related to the increased share repurchase activity and dividend payments during fiscal 2016. During fiscal 2016 we had the following significant uses of cash:
| |
• | $525.6 million related to our repurchase of approximately 8.0 million shares of our common stock pursuant to the share repurchase programs approved by our Board of Directors on July 19, 2016, and November 10, 2015; |
| |
• | $201.0 million related to the payment of cash dividends on our common stock; |
| |
• | $76.5 million related to the exercise of the option to acquire the remaining 34% interest in the filter joint venture from Panasonic; and |
| |
• | $73.3 million related to the minimum statutory payroll tax withholdings upon vesting of employee performance and restricted stock awards. |
These uses of cash were partially offset by the excess tax benefit from stock option exercises of $43.7 million and net proceeds from employee stock option exercises of $28.1 million during fiscal 2016.
Liquidity:
Cash and cash equivalent balances were $1,083.8 million at September 30, 2016, representing an increase of $40.2 million from October 2, 2015. The increase resulted from $1,095.7 million in cash generated from operations which was partially offset by $525.6 million used to repurchase 8.0 million shares of stock, and $201.0 million in cash dividend payments during fiscal 2016, $189.3 million in capital expenditures and $132.1 million related to business acquisition activity. Based on our historical results of operations, we expect that our cash and cash equivalents on hand and the cash we expect to generate from operations will be sufficient to fund our research and development, capital expenditures, potential acquisitions, working capital, quarterly cash dividend payments (if such
dividends are declared by the Board of Directors), outstanding commitments and other liquidity requirements associated with existing operations for at least the next 12 months. However, we cannot be certain that our cash on hand and cash generated from operations will be available in the future to fund all of our capital and operating requirements. In addition, any future strategic investments and acquisitions may require additional cash and capital resources. If we are unable to obtain sufficient cash or capital to meet our needs on a timely basis and on favorable terms, our business and operations could be materially and adversely affected.
Our invested cash balances primarily consist of highly liquid term deposits with original maturities of 90 days or less and money market funds where the underlying securities primarily consist of United States treasury obligations, United States agency obligations and repurchase agreements collateralized by United States government and agency obligations.
Our cash and cash equivalent balance of $1,083.8 million at September 30, 2016, consisted of $607.2 million held domestically and $476.6 million held by foreign subsidiaries. Of the cash and cash equivalents held by our foreign subsidiaries at September 30, 2016, $441.2 million is considered by us to be indefinitely reinvested and would be subject to material tax effects if repatriated. The remaining $35.4 million of foreign cash and cash equivalents was repatriated subsequent to the fiscal year ended September 30, 2016. The Company did not incur any tax impact as a result of this repatriation and the repatriated cash and cash equivalents will be reported as domestic cash on a go-forward basis.
OFF-BALANCE SHEET ARRANGEMENTS
All significant contractual obligations are recorded on our consolidated balance sheet or fully disclosed in the notes to our consolidated financial statements. We have no material off-balance sheet arrangements as defined in SEC Regulation S-K-303(a)(4)(ii).
CONTRACTUAL CASH FLOWS
Set forth below is a summary of our contractual payment obligations related to our operating leases, other commitments and long-term liabilities at September 30, 2016 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due By Period |
Obligation | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | Thereafter |
Other long-term liabilities (1) | | $ | 82.9 |
| | $ | 3.7 |
| | $ | 4.0 |
| | $ | 1.0 |
| | $ | 74.2 |
|
Operating lease obligations | | 98.2 |
| | 23.9 |
| | 39.0 |
| | 18.0 |
| | 17.3 |
|
Contingent consideration for business combinations (2) | | 7.9 |
| | 6.5 |
| | 1.4 |
| | — |
| | — |
|
Other commitments (3) | | 6.8 |
| | 6.2 |
| | 0.6 |
| | — |
| | — |
|
Total | | $ | 195.8 |
| | $ | 40.3 |
| | $ | 45.0 |
| | $ | 19.0 |
| | $ | 91.5 |
|
_________________________
| |
(1) | Other long-term liabilities include our gross unrecognized tax benefits, as well as executive deferred compensation, which are both classified as beyond five years due to the uncertain nature of the liabilities. |
| |
(2) | Contingent consideration related to business combinations is recorded at fair value and actual results could differ. See Note 3 and Note 4 of Item 8 of this Annual Report on Form 10-K for further detail. |
| |
(3) | Other commitments consist of contractual license and royalty payments and other purchase obligations. See Note 11 of Item 8 of this Annual Report on Form 10-K. |
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments in applying our most critical accounting policies that can have a significant impact on the results we report in our financial statements. The SEC has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and which require our most difficult, complex or subjective judgments or estimates. Based on this definition, our most critical accounting policies include revenue recognition, which impacts the recording of net revenue; inventory valuation, which impacts the cost of goods sold and gross margin; assessment of goodwill and long-lived assets, which impacts the impairment of the respective assets; business combinations, which impacts the fair value of acquired assets and assumed liabilities; share-based compensation, which impacts cost of goods sold and operating expenses; loss contingencies, which impacts operating expenses; and income taxes, which impacts the income tax provision. These policies and significant judgments involved are discussed further below. We have other significant accounting policies that do not generally require subjective estimates or judgments or would not have a material impact on our results of operations. Our significant accounting policies are described in Note 2 of Item 8 on this Annual Report on Form 10-K.
Revenue Recognition. We recognize revenue in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 605 Revenue Recognition net of estimated reserves. Our revenue reserves contain uncertainties because they require management to make assumptions and to apply judgment to estimate the value of future credits to customers for price protection and stock rotation for products sold to certain electronic component distributors. Our estimates of the amount and timing of the reserves is based primarily on historical experience and specific contractual arrangements. Historically, we have not experienced material differences between our estimated sales reserves and actual results.
Inventory Valuation. We value our inventory at the lower of cost or fair market value. Reserves for excess and obsolete inventory are established on a quarterly basis and are based on a detailed analysis of forecasted demand in relation to on-hand inventory, saleability of our inventory, general market conditions, and product life cycles. Once reserves are established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory. Our reserves contain uncertainties because the calculation requires management to make assumptions and to apply judgment regarding historical experience, forecasted demand and technological obsolescence. Changes in actual demand or market conditions could adversely impact our reserve calculations. Historically, we have not experienced material differences between our estimated inventory reserves and actual results.
Goodwill and Long-Lived Assets. We evaluate goodwill and long-lived assets for impairment annually on the first day of the fourth fiscal quarter and whenever events or circumstances arise that may indicate that the carrying value of the goodwill or other intangibles may not be recoverable.
Our impairment analysis contains uncertainties because it requires management to make assumptions and to apply judgment to items such as: determination of the reporting unit and asset groupings, estimated control premiums, discount rate, future cash flows, the profitability of future business strategies and useful lives. Historically, we have not experienced material differences between our impairment calculations and actual results.
Business Combinations. We apply significant estimates and judgments in order to determine the fair value of the identified tangible and intangible assets acquired, liabilities assumed and goodwill recognized in business combinations. The value of all assets and liabilities are recognized at fair value as of the acquisition date using a market participant approach.
In measuring the fair value, we utilize a number of valuation techniques consistent with the market approach, income approach and/ or cost approach. The valuation of the identifiable assets and liabilities includes assumptions such as projected revenue, royalty rates, weighted average cost of capital, discount rates and estimated useful lives. These assessments can be significantly affected by our judgments. Historically, we have not experienced material differences in our assigned values and actual results.
Share-Based Compensation. We have a share-based compensation plan which includes non-qualified stock options, restricted and performance share awards and units, employee stock purchase plan and other special share-based awards. Note 9 of Item 8 of this Annual Report on Form 10-K details our current share-based compensation programs.
We determine the fair value of our share-based compensation items with pricing models as of the date of grant using a number of highly complex and subjective variables and assumptions including, but not limited to: our expected stock price volatility over the term of the award, correlation coefficients, risk-free rate, the expected life of the award, forfeiture rates, dividend yield, estimated performance against metrics, etc. Compensation expense is recognized over the requisite service period of the underlying awards. Management periodically evaluates these assumptions and updates share-based compensation expense accordingly. Historically, we have not experienced material differences in our estimates and actual results.
Loss Contingencies. We record an estimate for loss contingencies such as a legal proceeding or claims if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We disclose material loss contingencies if there is at least a reasonable possibility that a loss has been incurred.
Our loss contingency analysis contains uncertainties because it requires management to assess the degree of probability of an unfavorable outcome and to make a reasonable estimate of the amount of potential loss. Historically, we have not experienced material differences between our estimates and actual results.
Income Taxes. We account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between tax and financial reporting. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Significant management judgment is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets.
The application of tax laws and regulations to calculate our tax liabilities is subject to legal and factual interpretation, judgment, and uncertainty in a multitude of jurisdictions. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations, and court rulings. We recognize potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest will be due. We record an amount as an estimate of probable additional income tax liability at the largest amount that we feel is more likely than not, based upon the technical merits of the position, to be sustained upon audit by the relevant tax authority. Historically, we have not experienced material differences between our estimates and actual results.
OTHER MATTERS
Inflation did not have a material impact on our results of operations during the three-year period ended September 30, 2016.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to overall financial market risks, such as changes in market liquidity, credit quality investment risk, interest rate risk and foreign exchange rate risk as described below.
Investment and Interest Rate Risk
Our exposure to interest rate and general market risks related principally to our investment portfolio, and consisted of the following (in millions):
|
| | | |
| September 30,
2016 |
Cash and cash equivalents (time deposits, certificates of deposit and money market funds) | $ | 1,083.8 |
|
Available for sale securities (auction rate security) at carrying value | 2.3 |
|
Total | $ | 1,086.1 |
|
The main objectives of our investment activities are the liquidity and preservation of capital. Our cash equivalent investments have short-term maturity periods that dampen the impact of market or interest rate risk. Credit risk associated with our investments is not material because our money market and deposits are diversified across several financial institutions with high credit ratings, which reduces the amount of credit exposure to any one counterparty.
Based on our results of operations for the fiscal year ended September 30, 2016, a hypothetical reduction in the interest rates on our cash and cash equivalents to zero would result in an immaterial reduction of interest income with a de minimis impact on income before taxes.
We own $3.2 million of par value auction rate securities that are currently valued at $2.3 million as of September 30, 2016. In the event that the market conditions change in the future and our auction rate security becomes fully and permanently impaired, the impact to income before income taxes would be the par value of the auction rate security of approximately $3.2 million as of September 30, 2016.
Given the low interest rate environment, the objectives of our investment activities, and the relatively low interest income generated from our cash and cash equivalents and other investments, we do not believe that market, investment or interest rate risks pose material exposures to our current business or results of operations.
Foreign Exchange Rate Risk
Substantially all sales to customers and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, thereby reducing the impact of foreign exchange rate fluctuations on our results. A percentage of our international operational expenses are denominated in foreign currencies and exchange rate volatility could positively or negatively impact those operating costs. For the fiscal years ended September 30, 2016, October 2, 2015, and October 3, 2014, we had foreign exchange (losses)/gains of ($0.3) million, $1.7 million and $0.1 million, respectively. Increases in the value of the United States dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States dollar relative to other currencies could result in our suppliers raising their prices to continue doing business with us. Given the relatively small number of customers and arrangements with third-party manufacturers denominated in foreign currencies, we do not believe that foreign exchange volatility has a material impact on our
current business or results of operations. However, fluctuations in currency exchange rates could have a greater effect on our business or results of operations in the future to the extent our expenses increasingly become denominated in foreign currencies.
We may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements of the Company are included herewith:
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| | |
(1) | | |
| | |
(2) | | |
| | |
(3) | | |
| | |
(4) | | |
| | |
(5) | | |
| | |
(6) | | |
| | |
(7) | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Skyworks Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Skyworks Solutions, Inc. and subsidiaries as of September 30, 2016 and October 2, 2015, and the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three-year period ended September 30, 2016. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in Item 15 of this Form 10-K. We also have audited Skyworks Solutions, Inc.’s internal control over financial reporting as of September 30, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Skyworks Solutions, Inc.’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule, and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Skyworks Solutions, Inc. and subsidiaries as of September 30, 2016 and October 2, 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, Skyworks Solutions, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) .
/s/ KPMG LLP
Boston, Massachusetts
November 22, 2016
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Net revenue | $ | 3,289.0 |
| | $ | 3,258.4 |
| | $ | 2,291.5 |
|
Cost of goods sold | 1,623.8 |
| | 1,703.9 |
| | 1,268.8 |
|
Gross profit | 1,665.2 |
| | 1,554.5 |
| | 1,022.7 |
|
Operating expenses: | | | | | |
Research and development | 312.4 |
| | 303.2 |
| | 252.2 |
|
Selling, general and administrative | 195.9 |
| | 191.3 |
| | 179.1 |
|
Amortization of intangibles | 33.4 |
| | 33.5 |
| | 25.9 |
|
Restructuring and other charges | 4.8 |
| | 3.4 |
| | 0.3 |
|
Total operating expenses | 546.5 |
| | 531.4 |
| | 457.5 |
|
Operating income | 1,118.7 |
| | 1,023.1 |
| | 565.2 |
|
Other (expense) income, net | (6.6 | ) | | 0.5 |
| | — |
|
Merger termination fee | 88.5 |
| | — |
| | — |
|
Income before income taxes | 1,200.6 |
| | 1,023.6 |
| | 565.2 |
|
Provision for income taxes | 205.4 |
| | 225.3 |
| | 107.5 |
|
Net income | $ | 995.2 |
| | $ | 798.3 |
| | $ | 457.7 |
|
Earnings per share: | | | | | |
Basic | $ | 5.27 |
| | $ | 4.21 |
| | $ | 2.44 |
|
Diluted | $ | 5.18 |
| | $ | 4.10 |
| | $ | 2.38 |
|
Weighted average shares: | | | | | |
Basic | 188.7 |
| | 189.5 |
| | 187.2 |
|
Diluted | 192.1 |
| | 194.9 |
| | 192.6 |
|
| | | | | |
Cash dividends declared and paid per share | $ | 1.06 |
| | $ | 0.65 |
| | $ | 0.22 |
|
See accompanying Notes to Consolidated Financial Statements.
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Net income | $ | 995.2 |
| | $ | 798.3 |
| | $ | 457.7 |
|
Other comprehensive income, net of tax | | | | | |
Pension adjustments | (1.8 | ) | | (0.2 | ) | | — |
|
Foreign currency translation adjustment | (0.9 | ) | | (3.1 | ) | | (4.0 | ) |
Comprehensive income | $ | 992.5 |
| | $ | 795.0 |
| | $ | 453.7 |
|
See accompanying Notes to Consolidated Financial Statements.
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
|
| | | | | | | |
| As of |
| September 30,
2016 | | October 2,
2015 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,083.8 |
| | $ | 1,043.6 |
|
Receivables, net of allowance for doubtful accounts of $0.5 and $0.4, respectively | 416.6 |
| | 538.0 |
|
Inventory | 424.0 |
| | 267.9 |
|
Other current assets | 77.7 |
| | 65.2 |
|
Total current assets | 2,002.1 |
| | 1,914.7 |
|
Property, plant and equipment, net | 806.3 |
| | 826.4 |
|
Goodwill | 873.3 |
| | 856.7 |
|
Intangible assets, net | 67.0 |
| | 45.0 |
|
Deferred tax assets, net | 54.1 |
| | 56.3 |
|
Other assets | 52.6 |
| | 20.3 |
|
Total assets | $ | 3,855.4 |
| | $ | 3,719.4 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 110.4 |
| | $ | 291.1 |
|
Accrued compensation and benefits | 42.3 |
| | 81.5 |
|
Other current liabilities | 57.5 |
| | 91.3 |
|
Total current liabilities | 210.2 |
| | 463.9 |
|
Long-term tax liabilities | 71.8 |
| | 71.0 |
|
Other long-term liabilities | 32.0 |
| | 25.3 |
|
Total liabilities | 314.0 |
| | 560.2 |
|
|
|
| |
|
|
Stockholders’ equity: | | | |
Preferred stock, no par value: 25.0 shares authorized, no shares issued | — |
| | — |
|
Common stock, $0.25 par value: 525.0 shares authorized; 222.5 shares issued and 184.9 shares outstanding as of September 30, 2016, and 219.0 shares issued and 190.3 shares outstanding as of October 2, 2015 | 46.2 |
| | 47.6 |
|
Additional paid-in capital | 2,686.0 |
| | 2,495.2 |
|
Treasury stock, at cost | (1,443.5 | ) | | (844.6 | ) |
Retained earnings | 2,263.6 |
| | 1,469.2 |
|
Accumulated other comprehensive loss | (10.9 | ) | | (8.2 | ) |
Total stockholders’ equity | 3,541.4 |
| | 3,159.2 |
|
Total liabilities and stockholders’ equity | $ | 3,855.4 |
| | $ | 3,719.4 |
|
See accompanying Notes to Consolidated Financial Statements.
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Cash flows from operating activities: | | | | | |
Net income | $ | 995.2 |
| | $ | 798.3 |
| | $ | 457.7 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Share-based compensation | 78.0 |
| | 99.8 |
| | 86.0 |
|
Depreciation | 214.4 |
| | 162.3 |
| | 96.8 |
|
Amortization of intangible assets | 33.4 |
| | 33.5 |
| | 25.9 |
|
Contribution of common shares to savings and retirement plans | 18.0 |
| | 20.9 |
| | 17.1 |
|
Deferred income taxes | — |
| | (3.9 | ) | | 3.3 |
|
Excess tax benefit from share-based compensation | (43.7 | ) | | (57.3 | ) | | (40.8 | ) |
Other | 0.3 |
| | 0.5 |
| | 1.0 |
|
Changes in assets and liabilities net of acquired balances: | | | | | |
Receivables, net | 121.4 |
| | (222.2 | ) | | (12.4 | ) |
Inventory | (147.3 | ) | | 3.6 |
| | (6.1 | ) |
Other current and long-term assets | (20.4 | ) | | (39.2 | ) | | 7.3 |
|
Accounts payable | (181.5 | ) | | 90.5 |
| | 74.2 |
|
Other current and long-term liabilities | 27.9 |
| | 106.0 |
| | 62.4 |
|
Net cash provided by operating activities | 1,095.7 |
| | 992.8 |
| | 772.4 |
|
Cash flows from investing activities: | | | | | |
Capital expenditures | (189.3 | ) | | (430.1 | ) | | (208.6 | ) |
Payments for acquisitions, net of cash acquired | (55.6 | ) | | (24.6 | ) | | (148.5 | ) |
Purchased intangibles | (6.0 | ) | | — |
| | — |
|
Net cash used in investing activities | (250.9 | ) | | (454.7 | ) | | (357.1 | ) |
Cash flows from financing activities: | | | | |
|
|
Payments for obligations recorded for business combinations | (76.5 | ) | | — |
| | — |
|
Excess tax benefit from share-based compensation | 43.7 |
| | 57.3 |
| | 40.8 |
|
Repurchase of common stock - payroll tax withholdings on equity awards | (73.3 | ) | | (54.2 | ) | | (22.1 | ) |
Repurchase of common stock - share repurchase program | (525.6 | ) | | (237.3 | ) | | (165.7 | ) |
Dividends paid | (201.0 | ) | | (123.1 | ) | | (41.4 | ) |
Net proceeds from exercise of stock options | 28.1 |
| | 57.0 |
| | 67.8 |
|
Net cash used in financing activities | (804.6 | ) | | (300.3 | ) | | (120.6 | ) |
Net increase in cash and cash equivalents | 40.2 |
| | 237.8 |
| | 294.7 |
|
Cash and cash equivalents at beginning of period | 1,043.6 |
| | 805.8 |
| | 511.1 |
|
Cash and cash equivalents at end of period | $ | 1,083.8 |
| | $ | 1,043.6 |
| | $ | 805.8 |
|
Supplemental cash flow disclosures: | | | | |
|
|
Income taxes paid | $ | 165.9 |
| | $ | 126.1 |
| | $ | 63.2 |
|
See accompanying Notes to Consolidated Financial Statements.
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of common stock | | Par value of common stock | | Shares of treasury stock | | Value of treasury stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Total stockholders’ equity |
Balance at September 27, 2013 | 187.9 |
| | $ | 47.0 |
| | 19.6 |
| | $ | (365.3 | ) | | $ | 2,041.4 |
| | $ | 378.9 |
| | $ | (0.9 | ) | | $ | 2,101.1 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 457.7 |
| | — |
| | 457.7 |
|
Exercise and settlement of share based awards and related tax benefit, net of shares withheld for taxes | 5.8 |
| | 1.4 |
| | 0.9 |
| | (22.1 | ) | | 129.9 |
| | — |
| | — |
| | 109.2 |
|
Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 75.8 |
| | — |
| | — |
| | 75.8 |
|
Share repurchase program | (4.5 | ) | | (1.1 | ) | | 4.5 |
| | (165.7 | ) | | 1.1 |
| | — |
| | — |
| | (165.7 | ) |
Dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (41.7 | ) | | — |
| | (41.7 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4.0 | ) | | (4.0 | ) |
Balance at October 3, 2014 | 189.2 |
| | $ | 47.3 |
| | 25.0 |
| | $ | (553.1 | ) | | $ | 2,248.2 |
| | $ | 794.9 |
| | $ | (4.9 | ) | | $ | 2,532.4 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 798.3 |
| | — |
| | 798.3 |
|
Exercise and settlement of share based awards and related tax benefit, net of shares withheld for taxes | 4.0 |
| | 1.0 |
| | 0.8 |
| | (54.2 | ) | | 156.7 |
| | — |
| | — |
| | 103.5 |
|
Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 89.6 |
| | — |
| | — |
| | 89.6 |
|
Share repurchase program | (2.9 | ) | | (0.7 | ) | | 2.9 |
| | (237.3 | ) | | 0.7 |
| | — |
| | — |
| | (237.3 | ) |
Dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (124.0 | ) | | — |
| | (124.0 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3.3 | ) | | (3.3 | ) |
Balance at October 2, 2015 | 190.3 |
| | $ | 47.6 |
| | 28.7 |
| | $ | (844.6 | ) | | $ | 2,495.2 |
| | $ | 1,469.2 |
| | $ | (8.2 | ) | | $ | 3,159.2 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 995.2 |
| | — |
| | 995.2 |
|
Exercise and settlement of share based awards and related tax benefit, net of shares withheld for taxes | 2.6 |
| | 0.6 |
| | 0.9 |
| | (73.3 | ) | | 109.1 |
| | — |
| | — |
| | 36.4 |
|
Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 79.7 |
| | — |
| | — |
| | 79.7 |
|
Share repurchase program | (8.0 | ) | | (2.0 | ) | | 8.0 |
| | (525.6 | ) | | 2.0 |
| | — |
| | — |
| | (525.6 | ) |
Dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (200.8 | ) | | — |
| | (200.8 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2.7 | ) | | (2.7 | ) |
Balance at September 30, 2016 | 184.9 |
| | $ | 46.2 |
| | 37.6 |
| | $ | (1,443.5 | ) | | $ | 2,686.0 |
| | $ | 2,263.6 |
| | $ | (10.9 | ) | | $ | 3,541.4 |
|
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Skyworks Solutions, Inc., together with its consolidated subsidiaries (“Skyworks” or the “Company”), is empowering the wireless networking revolution. The Company’s highly innovative analog semiconductors are connecting people, places, and things, spanning a number of new and previously unimagined applications within the automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and wearable markets.
The Company has evaluated subsequent events through the date of issuance of the audited consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All Skyworks subsidiaries are included in the Company’s consolidated financial statements and all intercompany balances are eliminated in consolidation.
FISCAL YEAR
The Company’s fiscal year ends on the Friday closest to September 30. Fiscal years 2016 and 2015 each consisted of 52 weeks and ended on September 30, 2016 and October 2, 2015, respectively. Fiscal year 2014 consisted of 53 weeks and ended on October 3, 2014.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, expenses, comprehensive income and accumulated other comprehensive loss during the reporting period. The Company evaluates its estimates on an ongoing basis using historical experience and other factors, including the current economic environment. Significant judgment is required in determining the reserves for and fair value of items such as allowance for doubtful accounts, overall fair value assessments of assets and liabilities, particularly those classified as Level 2 or Level 3 in the fair value hierarchy, inventory, intangible assets associated with business combinations, share-based compensation, loss contingencies, and income taxes. In addition, significant judgment is required in determining whether a potential indicator of impairment of long-lived assets exists and in estimating future cash flows for any necessary impairment testing. Actual results could differ significantly from these estimates.
CASH AND CASH EQUIVALENTS
The Company invests excess cash in time deposits, certificate of deposits and money market funds which primarily consist of United States treasury obligations, United States agency obligations, and repurchase agreements collateralized by United States government and agency obligations. The Company considers highly liquid investments with original maturities of 90 days or less when purchased as cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains general allowances for doubtful accounts related to potential losses that could arise due to customers’ inability to make required payments. These reserves require management to apply judgment in deriving these estimates. In addition, the Company performs ongoing credit evaluations of its customers’ financial condition and if it becomes aware of any specific receivables which may be uncollectable, they perform additional analysis including, but not limited to, factors such as a customer’s credit worthiness, intent and ability to pay and overall financial position, and reserves are recorded if deemed necessary. If the data the Company uses to calculate the allowance for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and results of operations could be materially affected.
INVESTMENTS
The Company classifies its investment in marketable securities as “available for sale”. Available for sale securities are carried at fair value with unrealized holding gains or losses recorded in other comprehensive income. Gains or losses are included in earnings in the period in which they are realized.
DERIVATIVES
The Company may utilize derivative financial instruments to manage market risks associated with fluctuations in foreign currency exchange rates on specific transactions that occur in the normal course of business. The criteria the Company uses for designating an instrument as a hedge is the instrument’s effectiveness in risk reduction. To receive hedge accounting treatment, hedges must be highly effective at offsetting the impact of the hedge transaction. All derivatives, whether designated as hedging relationships or not, are recorded at fair value and are included as either an asset or liability on the balance sheet.
FAIR VALUE
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principle or most advantageous market in an orderly transaction between market participants at the measurement date. Applicable accounting guidance provides a hierarchy for inputs used in measuring fair value that prioritize the use of observable inputs over the use of unobservable inputs, when such observable inputs are available. The three levels of inputs that may be used to measure fair value are as follows:
| |
• | Level 1 - Quoted prices in active markets for identical assets or liabilities. |
| |
• | Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data. |
| |
• | Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by the Company. |
It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value. If market prices are not available, the Company is required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument.
The Company measures certain assets and liabilities at fair value on a recurring basis in three levels, based on the market in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. It recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred.
The carrying value of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities approximates fair value due to short-term maturities of these assets and liabilities.
INVENTORY
Inventory is stated at the lower of cost or market on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost less accumulated depreciation, with significant renewals and betterments being capitalized and retired equipment written off in the respective periods. Maintenance and repairs are expensed as incurred.
Depreciation is calculated using the straight-line method over the estimated useful lives, which range from five to thirty years for buildings and improvements and three to ten years for machinery and equipment. Leasehold improvements are depreciated over the lesser of the economic life or the life of the associated lease.
VALUATION OF LONG-LIVED ASSETS
Definite lived intangible assets are carried at cost less accumulated amortization. Amortization is calculated based on the pattern of benefit to be recognized from the underlying asset over its estimated useful life. Carrying values for long-lived assets and definite lived intangible assets are reviewed for possible impairment as circumstances warrant. Factors considered important that could result in an impairment review include significant underperformance relative to expected, historical or projected future operating results, significant changes in the manner of use of assets or the Company’s business strategy, or significant negative industry or economic trends. In addition, impairment reviews are conducted at the judgment of management whenever asset/asset group values are deemed to be unrecoverable relative to future undiscounted cash flows expected to be generated by that particular asset/asset group. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset/asset group and its eventual disposition. Such estimates require management to exercise judgment and make assumptions regarding factors such as future revenue streams, operating expenditures, cost allocation and asset utilization levels, all of which collectively impact future operating performance. The Company’s estimates of undiscounted cash flows may differ from actual cash flows due to, among
other things, technological changes, economic conditions, changes to its business model or changes in its operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value of an asset/asset group, the Company would recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset or asset group.
GOODWILL AND INDEFINITE INTANGIBLE ASSETS
Goodwill and indefinite-lived intangible assets are not amortized but are tested at least annually as of the first day of the fourth fiscal quarter for impairment or more frequently if indicators of impairment exist during the fiscal year. Indefinite-lived intangible assets comprise an insignificant portion of the total book value of the Company’s intangible assets. The Company assesses its conclusion regarding segments and reporting units in conjunction with its annual goodwill impairment test, and has determined that it has one reporting unit for the purposes of allocating and testing goodwill.
The goodwill impairment test is a two-step process. The first step of the Company’s impairment analysis compares its fair value to its net book value to determine if there is an indicator of impairment. In the Company’s calculation of fair value, it considers the closing price of its common stock on the selected testing date, the number of shares of its common stock outstanding and other marketplace activity such as a related control premium. If the calculated fair value is determined to be less than the book value of the Company, then the Company performs step two of the impairment analysis. Step two of the analysis compares the implied fair value of the Company’s goodwill to its book value. If the book value of the Company’s goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess.
BUSINESS COMBINATIONS
The Company uses the acquisition method of accounting for business combinations and recognizes assets acquired and liabilities assumed at their fair values on the date acquired. Goodwill represents the excess of the purchase price over the fair value of the net assets. The fair values of the assets and liabilities acquired are determined based upon the Company’s valuation using a combination of market, income or cost approaches. The valuation involves making significant estimates and assumptions, which are based on detailed financial models including the projection of future cash flows, the weighted average cost of capital and any cost savings that are expected to be derived in the future.
EMPLOYEE RETIREMENT BENEFIT PLANS
The funded status of benefit pension plans, or the balance of plan assets and benefit obligations is recognized on the consolidated balance sheet and pension liability adjustments, net of tax, are recorded in Accumulated Other Comprehensive Income. The Company determines discount rates considering the rates of return on high-quality fixed income investments, and the expected long-term rate of return on pension plan assets by considering the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. Decreases in discount rates lead to increases in benefit obligations that, in turn, could lead to an increase in amortization cost through amortization of actuarial gain or loss. A decline in the market values of plan assets will generally result in a lower expected rate of return, which would result in an increase of future retirement benefit costs.
REVENUE RECOGNITION
Revenue from product sales is recognized when there is persuasive evidence of an arrangement, the price to the buyer is fixed and determinable, delivery and transfer of title have occurred in accordance with the shipping terms specified in the arrangement with the customer and collectability is reasonably assured. Revenue from license fees and intellectual property is recognized when due and payable, and all other criteria previously noted have been met. The Company ships product on consignment to certain customers and only recognizes revenue when the customer notifies the Company that the inventory has been consumed. Revenue recognition is deferred in all instances where the earnings process is incomplete. Certain product sales are made to electronic component distributors under agreements allowing for price protection and stock rotation on unsold products. Reserves for sales returns and allowances are recorded based on historical experience or pursuant to contractual arrangements necessitating revenue reserves.
SHARE-BASED COMPENSATION
The Company recognizes compensation expense for all share-based payment awards made to employees and directors including non-qualified employee stock options, share awards and units, employee stock purchase plan and other special share-based awards based on estimated fair values.
The fair value of share-based payment awards is amortized over the requisite service period, which is defined as the period during which an employee is required to provide service in exchange for an award. The Company uses a straight-line attribution method for all grants that include only a service condition. Awards with both performance and service conditions are expensed over the service period for each separately vesting tranche.
Share-based compensation expense recognized during the period includes actual expense on vested awards and expense associated with unvested awards that has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company reviews actual forfeitures at least annually.
The Company determines the fair value of share-based option awards based on the Company’s closing stock price on the date of grant using a Black-Scholes options pricing model. Under the Black-Scholes model, a number of highly complex and subjective variables are used including, but not limited to: the expected stock price volatility over the term of the award, the risk-free rate, the expected life of the award and dividend yield. The determination of fair value of restricted and certain performance share awards and units is based on the value of the Company’s stock on the date of grant with performance awards and units adjusted for the actual outcome of the underlying performance condition.
For more complex performance awards including units with market-based performance conditions the Company employs a Monte Carlo simulation valuation method to calculate the fair value of the awards based on the most likely outcome. Under the Monte Carlo simulation, a number of highly complex and subjective variables are used including, but not limited to: the expected stock price volatility over the term of the award, a correlation coefficient, the risk-free rate, the expected life of the award, and dividend yield.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
LOSS CONTINGENCIES
The Company records its best estimates of a loss contingency when it is considered probable and the amount can be reasonably estimated. When a range of loss can be reasonably estimated with no best estimate in the range, the minimum estimated liability related to the claim is recorded. As additional information becomes available, the Company assesses the potential liability related to the potential pending loss contingency and revises its estimates. Loss contingencies are disclosed if there is at least a reasonable possibility that a loss or an additional loss may have been incurred and legal costs are expensed as incurred.
RESTRUCTURING
A liability for post-employment benefits is recorded when payment is probable, the amount is reasonably estimable, and the obligation relates to rights that have vested or accumulated.
FOREIGN CURRENCIES
The Company’s primary functional currency is the United States dollar. Gains and losses related to foreign currency transactions, conversion of foreign denominated cash balances and translation of foreign currency financial statements are included in current results. For certain foreign entities that utilize local currencies as their functional currency, the resulting unrealized translation gains and losses are reported as currency translation adjustment through other comprehensive income (loss) for each period.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. This method also requires the recognition of future tax benefits such as net operating loss carry forwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The carrying value of the Company’s net deferred tax assets assumes the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in its Consolidated Statement of Operations. Management evaluates the realizability of the deferred tax assets and assesses the adequacy of the valuation allowance quarterly. Likewise, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax assets would increase income or decrease the carrying value of goodwill in the period such determination was made.
The determination of recording or releasing tax valuation allowances is made, in part, pursuant to an assessment performed by management regarding the likelihood that the Company will generate future taxable income against which benefits of its deferred tax assets may or may not be realized. This assessment requires management to exercise significant judgment and make estimates with respect to its ability to generate revenues, gross profits, operating income and taxable income in future periods. Amongst other factors, management must make assumptions regarding overall business and semiconductor industry conditions, operating efficiencies, the Company’s ability to develop products to its customers’ specifications, technological change, the competitive environment and changes in regulatory requirements which may impact its ability to generate taxable income and, in turn, realize the value of its deferred tax assets.
The calculation of the Company’s tax liabilities includes addressing uncertainties in the application of complex tax regulations and is based on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The Company recognizes liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on its recognition threshold and measurement attribute of whether it is more likely than not that the positions the Company has taken in tax filings will be sustained upon tax audit, and the extent to which, additional taxes would be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period in which it is determined the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. The Company recognizes any interest or penalties, if incurred, on any unrecognized tax benefits as a component of income tax expense.
EARNINGS PER SHARE
Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporate the potentially dilutive incremental shares issuable upon the assumed exercise of stock options, the assumed vesting of outstanding restricted stock units and performance stock units, and the assumed issuance of common stock under the stock purchase plan using the treasury share method.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2015, the FASB deferred the effective date of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The guidance will be effective for the first quarter of the Company’s fiscal year 2019. Early adoption is permitted, but not before the first quarter of fiscal year 2018. The new guidance is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method and is still evaluating the impact of this ASU on its consolidated financial statements and related disclosure.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to reflect most leases on their balance sheet as assets and obligations. The effective date for the standard is for fiscal years beginning after December 15, 2018, with early adoption permitted. The standard is to be applied under the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented. The Company is evaluating the effects that this ASU will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB Issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The effective date for the standard is for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company does not anticipate it will adopt this ASU early and is evaluating the effects that this ASU will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The standard addresses the classification and presentation of eight specific cash flow issues that currently result in diverse practices. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. The amendments in this ASU should be applied using a retrospective approach. The Company is evaluating the effects that this ASU will have on its consolidated financial statements.
There have been no other recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to the Company.
3. BUSINESS COMBINATIONS
On October 29, 2015, the Company entered into an Amended and Restated Agreement and Plan of Merger (the “Merger Agreement”) with PMC-Sierra, Inc. (“PMC”), providing for, subject to the terms and conditions of the Merger Agreement, the cash acquisition of PMC by the Company. On November 23, 2015, PMC notified the Company that it had terminated the Merger Agreement. As a result, on November 24, 2015, PMC paid the Company a termination fee of $88.5 million pursuant to the Merger Agreement.
During the fiscal year ended September 30, 2016, the Company acquired two businesses for total aggregate cash consideration of $55.6 million together with future contingent payments. The total future contingent consideration payments range from zero to $10.0 million and are based upon the achievement of specified objectives that are payable up to two years from the anniversary of the acquisitions, which at closing had a total estimated fair value of $7.4 million. In allocating the total purchase consideration for these acquisitions based on preliminary estimated fair values, the Company recorded $16.6 million of goodwill and $35.5 million of identifiable intangibles assets. Intangible assets acquired primarily included customer relationships and developed technology with weighted average useful lives of 4.0 years. These acquisitions are treated as asset purchases for tax purposes and accordingly, the goodwill resulting from these acquisitions is expected to be deductible.
The fair value estimates for the assets acquired and liabilities assumed for acquisitions completed during the fiscal year ended September 30, 2016, were based upon preliminary calculations and valuations, and the Company’s estimates and assumptions for each of these acquisitions are subject to change as it obtains additional information during the respective measurement periods (up to one year from the respective acquisition dates).
Net revenue and net income from these acquisitions has been included in the Consolidated Statements of Operations from the acquisition date through the end of the fiscal year on September 30, 2016. The impact of these acquisitions to the ongoing operations on the Company’s net revenue and net income was not significant for the fiscal year ended September 30, 2016. The Company incurred immaterial transaction-related costs during the period fiscal year September 30, 2016, which were included within the sales, administrative and general account. Due to the materiality of these acquisitions, the disclosures required by the applicable accounting guidance have been excluded.
On August 1, 2016, the Company exercised its purchase option on the joint venture with Panasonic with respect to the design, manufacture and sale of Panasonic filter products, and paid Panasonic $76.5 million in cash. As a result of exercising the purchase option, the Company owns 100% of the filter joint venture.
On October 7, 2016, the Company acquired a business for $14.4 million in cash and contingent consideration ranging from zero to $20.0 million payable over a three-year period. Due to the timing of the acquisition and the date of this filing, the Company has yet to assess the fair value of the assets acquired and liabilities assumed and accordingly, the disclosures required have been omitted.
4. FAIR VALUE
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company measures certain assets and liabilities at fair value on a recurring basis such as its financial instruments and derivatives. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the fiscal year ended September 30, 2016.
Level 3 assets include an auction rate security that is classified as available for sale and recorded in other current assets and that is scheduled to mature in 2017. Due to the illiquid market for this security the Company has classified the carrying value as a Level 3 asset with the difference between the par and carrying value being categorized as a temporary loss and recorded in accumulated other comprehensive loss.
On August 1, 2016, the Company exercised its option and paid cash for the remaining interest in the joint venture with Panasonic as detailed in Note 3 of these Notes to Consolidated Financial Statements. This purchase option was recorded as a Level 3 liability as of October 2, 2015.
The Company held foreign currency call and put options (“foreign currency options”) that were intended to hedge the potential cash exposure related to the Panasonic purchase option. These foreign currency options expired unexercised during the fiscal year ended September 30, 2016, as the call and put options were out of the money,
The Company classifies its contingent consideration related to its business combinations as detailed in Note 3 of these Notes to Consolidated Financial Statements, made during the fiscal year ended September 30, 3016, as Level 3 liabilities. This assessment is
based on management judgment involved in computing the expected achievements of specified objectives that are payable up to two years from the anniversary of the acquisitions. The Company reassesses the fair value of the contingent consideration on a quarterly basis and records any applicable adjustments to earnings in the period they are determined.
Assets and liabilities recorded at fair value on a recurring basis consisted of the following (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2016 | | As of October 2, 2015 |
| | | Fair Value Measurements | | | | Fair Value Measurements |
| Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | | | | | | | | |
Money market funds | $ | 408.7 |
| | $ | 408.7 |
| | $ | — |
| | $ | — |
| | $ | 464.6 |
| | $ | 464.6 |
| | $ | — |
| | $ | — |
|
Auction rate security | 2.3 |
| | — |
| | — |
| | 2.3 |
| | 2.3 |
| | — |
| | — |
| | 2.3 |
|
Foreign currency derivative assets | — |
| | — |
| | — |
| | — |
| | 3.3 |
| | — |
| | — |
| | 3.3 |
|
Total | $ | 411.0 |
| | $ | 408.7 |
| | $ | — |
| | $ | 2.3 |
| | $ | 470.2 |
| | $ | 464.6 |
| | $ | — |
| | $ | 5.6 |
|
Liabilities | | | | | | | | | | | | | | | |
Purchase obligation recorded for business combinations | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 75.4 |
| | $ | — |
| | $ | — |
| | $ | 75.4 |
|
Foreign currency derivative liabilities | — |
| | — |
| | — |
| | — |
| | 2.8 |
| | — |
| | — |
| | 2.8 |
|
Contingent consideration liability recorded for business combinations | 7.9 |
| | — |
| | — |
| | 7.9 |
| | 0.5 |
| | — |
| | — |
| | 0.5 |
|
Total | $ | 7.9 |
| | $ | — |
| | $ | — |
| | $ | 7.9 |
| | $ | 78.7 |
| | $ | — |
| | $ | — |
| | $ | 78.7 |
|
The following table summarizes changes to the fair value of the Level 3 assets (in millions):
|
| | | | | | | |
| Auction rate security | | Foreign currency derivative |
Balance as of October 2, 2015 | $ | 2.3 |
| | $ | 3.3 |
|
Changes in fair value included in earnings | — |
| | (3.3 | ) |
Balance as of September 30, 2016 | $ | 2.3 |
| | $ | — |
|
The following table summarizes changes to the fair value of the Level 3 liabilities (in millions):
|
| | | | | | | | | | | |
| Purchase obligation | | Foreign currency derivative | | Contingent consideration |
Balance as of October 2, 2015 | $ | 75.4 |
| | $ | 2.8 |
| | $ | 0.5 |
|
Increases to Level 3 liabilities | — |
| | — |
| | 7.4 |
|
Changes in fair value included in earnings | — |
| | (2.8 | ) | | — |
|
Decreases of Level 3 liabilities | (75.4 | ) | | — |
| | — |
|
Balance as of September 30, 2016 | $ | — |
| | $ | — |
| | $ | 7.9 |
|
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets and liabilities, such as goodwill, intangible assets, and other long-lived assets resulting from business combinations are measured at fair value using income approach valuation methodologies at the date of acquisition and are subsequently re-measured if there are indicators of impairment.
5. INVENTORY
Inventory consists of the following (in millions):
|
| | | | | | | |
| As of |
| September 30,
2016 | | October 2,
2015 |
Raw materials | $ | 18.5 |
| | $ | 30.0 |
|
Work-in-process | 255.5 |
| | 192.4 |
|
Finished goods | 140.4 |
| | 38.0 |
|
Finished goods held on consignment by customers | 9.6 |
| | 7.5 |
|
Total inventory | $ | 424.0 |
| | $ | 267.9 |
|
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment net consists of the following (in millions):
|
| | | | | | | |
| As of |
| September 30,
2016 | | October 2,
2015 |
Land and improvements | $ | 11.6 |
| | $ | 11.6 |
|
Buildings and improvements | 133.5 |
| | 101.7 |
|
Furniture and fixtures | 29.5 |
| | 26.9 |
|
Machinery and equipment | 1,533.3 |
| | 1,285.4 |
|
Construction in progress | 59.9 |
| | 159.8 |
|
Total property, plant and equipment, gross | 1,767.8 |
| | 1,585.4 |
|
Accumulated depreciation | (961.5 | ) | | (759.0 | ) |
Total property, plant and equipment, net | $ | 806.3 |
| | $ | 826.4 |
|
7. GOODWILL AND INTANGIBLE ASSETS
The changes to the carrying amount of goodwill are as follows (in millions):
|
| | | | | | | |
| As of |
| September 30,
2016 | | October 2,
2015 |
Goodwill at beginning of the period | $ | 856.7 |
| | $ | 851.0 |
|
Goodwill recognized through business combinations (Note 3) | 16.6 |
| | 3.3 |
|
Goodwill adjustments | — |
| | 2.4 |
|
Impairments | — |
| | — |
|
Goodwill at the end of the period | $ | 873.3 |
| | $ | 856.7 |
|
The changes in goodwill during the fiscal year ended September 30, 2016, relate to the amounts recognized through the business combinations completed during the period as detailed in Note 3, Business Combinations, in these Notes to the Consolidated Financial Statements.
The Company performed an impairment test of its goodwill as of the first day of the fourth fiscal quarter in accordance with its regularly scheduled testing. The results of this test indicated that the Company’s goodwill was not impaired. There were no other indicators of impairment noted during the fiscal year ended September 30, 2016.
Intangible assets consist of the following (in millions): |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of | | As of |
|
Weighted average amortization period remaining (years) | September 30, 2016 | | October 2, 2015 |
| Gross carrying amount | |
Accumulated amortization | | Net carrying amount | | Gross carrying amount | |
Accumulated amortization | | Net carrying amount |
Customer relationships | 4.2 | $ | 78.5 |
| | $ | (57.7 | ) | | $ | 20.8 |
| | $ | 57.2 |
| | $ | (48.7 | ) | | $ | 8.5 |
|
Developed technology and other | 5.8 | 133.8 |
| | (89.2 | ) | | 44.6 |
| | 99.7 |
| | (64.8 | ) | | 34.9 |
|
Trademarks | Indefinite | 1.6 |
| | — |
| | 1.6 |
| | 1.6 |
| | — |
| | 1.6 |
|
Total intangible assets | | $ | 213.9 |
| | $ | (146.9 | ) | | $ | 67.0 |
| | $ | 158.5 |
| | $ | (113.5 | ) | | $ | 45.0 |
|
The net carrying amount of intangible assets increased for the fiscal year ended September 30, 2016, primarily due to the identifiable intangible assets acquired during the fiscal year as discussed in Note 3, Business Combinations, in these Notes to the Consolidated Financial Statements.
Annual amortization expense for the next five years related to intangible assets is expected to be as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter |
Amortization expense | $ | 23.6 |
| | $ | 11.0 |
| | $ | 9.3 |
| | $ | 7.4 |
| | $ | 5.3 |
| | $ | 8.8 |
|
8. INCOME TAXES
Income before income taxes consists of the following components (in millions):
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
United States | $ | 697.5 |
| | $ | 602.1 |
| | $ | 346.8 |
|
Foreign | 503.1 |
| | 421.5 |
| | 218.4 |
|
Income before income taxes | $ | 1,200.6 |
| | $ | 1,023.6 |
| | $ | 565.2 |
|
The provision for income taxes consists of the following (in millions):
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Current tax expense (benefit): | | | | | |
Federal | $ | 181.8 |
| | $ | 199.5 |
| | $ | 88.2 |
|
State | 0.1 |
| | (0.5 | ) | | (0.5 | ) |
Foreign | 25.8 |
| | 33.9 |
| | 13.5 |
|
| 207.7 |
| | 232.9 |
| | 101.2 |
|
Deferred tax expense (benefit): | | | | | |
Federal | (0.8 | ) | | (2.0 | ) | | 12.3 |
|
Foreign | (1.5 | ) | | (5.6 | ) | | (6.0 | ) |
| (2.3 | ) | | (7.6 | ) | | 6.3 |
|
| | | | | |
Provision for income taxes | $ | 205.4 |
| | $ | 225.3 |
| | $ | 107.5 |
|
The actual income tax expense is different than that which would have been computed by applying the federal statutory tax rate to income before income taxes. A reconciliation of income tax expense as computed at the United States federal statutory income tax rate to the provision for income tax expense is as follows (in millions):
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Tax expense at United States statutory rate | $ | 420.2 |
| | $ | 358.3 |
| | $ | 197.8 |
|
Foreign tax rate difference | (164.1 | ) | | (120.9 | ) | | (77.3 | ) |
Research and development credits | (33.7 | ) | | (15.0 | ) | | (2.8 | ) |
Change in tax reserve | 18.9 |
| | 25.5 |
| | 11.0 |
|
Change in valuation allowance | 13.9 |
| | 4.4 |
| | 9.8 |
|
Domestic production activities deduction | (19.1 | ) | | (19.7 | ) | | (10.9 | ) |
Audit settlements and adjustments | (21.4 | ) | | — |
| | (19.7 | ) |
Other, net | (9.3 | ) | | (7.3 | ) | | (0.4 | ) |
Provision for income taxes | $ | 205.4 |
| | $ | 225.3 |
| | $ | 107.5 |
|
The Company operates in foreign jurisdictions with income tax rates lower than the United States tax rate of 35%. The Company’s tax benefits related to foreign earnings taxed at a rate less than the United States federal rate were $164.1 million and $120.9 million for the fiscal years ended September 30, 2016, and October 2, 2015, respectively.
During the fiscal year ended September 30, 2016, the Company concluded an IRS examination of its federal income tax returns for fiscal years 2012 and 2013. The Company agreed to various adjustments to its fiscal year 2012 and 2013 tax returns that resulted in the recognition of current year tax expense of $2.6 million during the fiscal year ended September 30, 2016. With the conclusion of the audit, the Company decreased the reserve for uncertain tax positions, which resulted in the recognition of an income tax benefit of $24.0 million in fiscal 2016.
In December 2015, the United States Congress enacted the Protecting Americans from Tax Hikes Act of 2015, extending numerous tax provisions that had expired. This legislation included a permanent extension of the federal research and experimentation tax credit. As a result of the enactment of this legislation, $11.6 million of federal research and experimentation tax credits that were earned in the fiscal year ended October 2, 2015 reduced the Company’s tax expense and tax rate during the fiscal year ended September 30, 2016.
The federal tax credit available under the Internal Revenue Code for research and development expenses expired on December 31, 2014. As of October 2, 2015, the United States Congress had not taken action to extend the Research and Experimentation Tax Credit. Accordingly, the income tax provision for the year ended October 2, 2015, did not reflect the impact of any research and development tax credits that would have been earned after December 31, 2014, had the federal tax credit not expired.
On December 19, 2014, the Tax Increase Prevention Act of 2014 was signed into law, extending the Research and Experimentation Tax Credit to reinstate and retroactively extend credits earned in calendar year 2014. As a result of the enactment of this law, $11.0 million of federal research and development tax credits that were earned in fiscal 2014 reduced the tax rate during fiscal 2015. These credits were not reflected in the fiscal 2014 tax rate.
During the fourth quarter of fiscal 2014, the Company concluded an IRS examination of its federal income tax return for fiscal year 2011. As a result of the conclusion of the IRS examination, the Company agreed to various adjustments to its fiscal 2011 tax return that resulted in the recognition of tax expense of $0.7 million and $1.9 million for fiscal years 2014 and 2013, respectively. In addition, the conclusion of the IRS examination also resulted in a decrease in the uncertain tax positions of $20.9 million in fiscal 2014, of which $20.4 million was recognized as a benefit to tax expense.
In December 2013, Mexico enacted a comprehensive tax reform package, which became effective on January 1, 2014. As a result of this change, the Company adjusted its deferred taxes in that jurisdiction, resulting in the recognition of a tax benefit that reduced the Company’s foreign income tax expense by $4.6 million for year ended October 3, 2014.
On October 2, 2010, the Company expanded its presence in Asia by launching operations in Singapore. The Company operates under a tax holiday in Singapore, which is effective through September 30, 2020 and is conditional upon the Company’s compliance with certain employment and investment thresholds in Singapore. The impact of the tax holiday decreased Singapore’s taxes by $30.8 million and $26.6 million for the fiscal years ended September 30, 2016, and October 2, 2015, respectively, which resulted in tax benefits of $0.16 and $0.14 of diluted earnings per share, respectively.
Deferred income tax assets and liabilities consist of the tax effects of temporary differences related to the following (in millions):
|
| | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 |
Deferred tax assets: | | | |
Current: | | | |
Inventory | $ | 8.1 |
| | $ | 4.9 |
|
Bad debts | 0.2 |
| | 0.1 |
|
Accrued compensation and benefits | 5.4 |
| | 5.2 |
|
Product returns, allowances and warranty | 8.6 |
| | 4.3 |
|
Restructuring | 0.8 |
| | 0.1 |
|
Other, net | 3.1 |
| | 0.6 |
|
Current deferred tax assets | 26.2 |
| | 15.2 |
|
Less valuation allowance | (12.2 | ) | | (6.4 | ) |
Net current deferred tax assets | 14.0 |
| | 8.8 |
|
Long-term: | | | |
Intangible assets | 11.6 |
| | 11.6 |
|
Share-based and other deferred compensation | 40.2 |
| | 44.6 |
|
Net operating loss carry forwards | 7.4 |
| | 7.4 |
|
Non-United States tax credits | 14.7 |
| | 11.5 |
|
State tax credits | 64.0 |
| | 53.4 |
|
Other, net | 2.5 |
| | 2.4 |
|
Long-term deferred tax assets | 140.4 |
| | 130.9 |
|
Less valuation allowance | (66.9 | ) | | (58.8 | ) |
Net long-term deferred tax assets | 73.5 |
| | 72.1 |
|
| | | |
Deferred tax assets | 166.6 |
| | 146.1 |
|
Less valuation allowance | (79.1 | ) | | (65.2 | ) |
Net deferred tax assets | 87.5 |
| | 80.9 |
|
Deferred tax liabilities: | | | |
Current: | | | |
Prepaid insurance | (0.8 | ) | | (0.8 | ) |
Current deferred tax liabilities | (0.8 | ) | | (0.8 | ) |
Long-term: | | | |
Property, plant and equipment | (16.5 | ) | | (10.1 | ) |
Intangible assets | (8.4 | ) | | (8.2 | ) |
Long-term deferred tax liabilities | (24.9 | ) | | (18.3 | ) |
| | | |
Net deferred tax liabilities | (25.7 | ) | | (19.1 | ) |
Total net deferred tax assets | $ | 61.8 |
| | $ | 61.8 |
|
In accordance with GAAP, management has determined that it is more likely than not that a portion of its historic and current year income tax benefits will not be realized. As of September 30, 2016, the Company has maintained a valuation allowance of $79.1 million. This valuation allowance is comprised of $64.0 million related to United States state tax credits, and $15.1 million related to foreign deferred tax assets. The Company does not anticipate sufficient taxable income or tax liability to utilize these state and foreign credits. If these benefits are recognized in a future period the valuation allowance on deferred tax assets will be reversed and up to a $79.1 million income tax benefit may be recognized. The Company will need to generate $137.5 million of future United States federal taxable income to utilize our United States deferred tax assets as of September 30, 2016. The Company believes that
future reversals of taxable temporary differences, and its forecast of continued earnings in its domestic and foreign jurisdictions, support its decision to not record a valuation allowance on other deferred tax assets.
Deferred tax assets are recognized for foreign operations when management believes it is more likely than not that the deferred tax assets will be recovered during the carry forward period. The Company will continue to assess its valuation allowance in future periods.
As of September 30, 2016, the Company has United States federal net operating loss carry forwards of approximately $9.3 million. The utilization of these net operating losses is subject to certain annual limitations as required under Internal Revenue Code section 382 and similar state income tax provisions. The United States federal net operating loss carry forwards expire at various dates through 2035. The Company also has state income tax credit carry forwards of $64.0 million, net of federal benefits, for which the Company has provided a valuation allowance. The state tax credits relate primarily to California research tax credits that can be carried forward indefinitely.
The Company has continued to expand its operations and increase its investments in numerous international jurisdictions. These activities will increase the Company’s earnings attributable to foreign jurisdictions. As of September 30, 2016, no provision has been made for United States federal, state, or additional foreign income taxes related to approximately $1,676.8 million of undistributed earnings of foreign subsidiaries which have been or are intended to be permanently reinvested due to its foreign operations. It is not practicable to determine the United States federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):
|
| | | |
| Unrecognized tax benefits |
Balance at October 2, 2015 | $ | 81.2 |
|
Increases based on positions related to prior years | 2.0 |
|
Increases based on positions related to current year | 19.7 |
|
Decreases relating to settlements with taxing authorities | (22.6 | ) |
Decreases relating to lapses of applicable statutes of limitations | (0.6 | ) |
Balance at September 30, 2016 | $ | 79.7 |
|
Of the total unrecognized tax benefits at September 30, 2016, $60.8 million would impact the effective tax rate, if recognized. The remaining unrecognized tax benefits would not impact the effective tax rate, if recognized, due to the Company’s valuation allowance and certain positions that were required to be capitalized. During the fiscal year ended September 30, 2016, the Company concluded an IRS examination of its federal income tax returns for fiscal 2012 and 2013. The conclusion of the IRS examination resulted in a decrease in the uncertain tax positions of $24.0 million in fiscal 2016, all of which was recognized as a benefit to its tax expense in fiscal 2016. The Company anticipates reversals within the next 12 months related to items such as the lapse of the statute of limitations, audit closures, and other items that occur in the normal course of business. During the fiscal year ended September 30, 2016, the Company recognized $0.6 million of previously unrecognized tax benefits related to the expiration of the statute of limitations and $1.9 million of accrued interest or penalties related to unrecognized tax benefits.
The Company’s major tax jurisdictions as of September 30, 2016, are the United States, California, Canada, Luxembourg, Mexico and Singapore. For the United States, the Company has open tax years dating back to fiscal 1999 due to the carry forward of tax attributes. For California, the Company has open tax years dating back to fiscal 1999 due to the carry forward of tax attributes. For Canada, the Company has open tax years dating back to fiscal 2008. For Luxembourg, the Company has open tax years back to fiscal 2011. For Mexico, the Company has open tax years back to fiscal 2009. For Singapore, the Company has open tax years dating back to fiscal 2011. The Company is subject to audit examinations by the respective taxing authorities on a periodic basis, of which the results could impact our financial position, results of operations or cash flows.
9. STOCKHOLDERS’ EQUITY
COMMON STOCK
At September 30, 2016, the Company is authorized to issue 525.0 million shares of common stock, par value $0.25 per share, of which 222.5 million shares are issued and 184.9 million shares are outstanding.
Holders of the Company’s common stock are entitled to dividends in the event declared by the Company’s Board of Directors out of funds legally available for such purpose. Dividends may not be paid on common stock unless all accrued dividends on preferred stock, if any, have been paid or declared and set aside. In the event of the Company’s liquidation, dissolution or winding up, the holders of common stock will be entitled to share pro rata in the assets remaining after payment to creditors and after payment of the liquidation preference plus any unpaid dividends to holders of any outstanding preferred stock.
Each holder of the Company’s common stock is entitled to one vote for each such share outstanding in the holder’s name. No holder of common stock is entitled to cumulate votes in voting for directors. The Company’s restated certificate of incorporation as amended to date, (the “Certificate of Incorporation”) provides that, unless otherwise determined by the Company’s Board of Directors, no holder of stock has any preemptive right to purchase or subscribe for any stock of any class which the Company may issue or sell.
PREFERRED STOCK
The Company’s Certificate of Incorporation has authorized and permits the Company to issue up to 25.0 million shares of preferred stock without par value in one or more series and with rights and preferences that may be fixed or designated by the Company’s Board of Directors without any further action by the Company’s stockholders. The designation, powers, preferences, rights and qualifications, limitations and restrictions of the preferred stock of each series will be fixed by the certificate of designation relating to such series, which will specify the terms of the preferred stock. At September 30, 2016, the Company had no shares of preferred stock issued or outstanding.
SHARE REPURCHASE
On July 19, 2016, the Board of Directors approved a new share repurchase program, pursuant to which the Company is authorized to repurchase up to $400.0 million of its common stock from time to time on the open market or in privately negotiated transactions as permitted by securities laws and other legal requirements. The repurchase program is set to expire on July 19, 2018; however, it may be suspended, discontinued or extended by the Board of Directors at any time prior to its expiration on July 19, 2018. This authorized stock repurchase program replaced in its entirety the November 10, 2015, stock repurchase program. These repurchases have been and will be funded with the Company’s working capital.
During the fiscal year ended September 30, 2016, the company paid approximately $525.6 million (including commissions) in connection with the repurchase of 8.0 million shares of its common stock (paying an average price of $65.70 per share) under the July 19, 2016, share repurchase plan and the replaced November 10, 2015, share repurchase plan. As of September 30, 2016, $201.4 million remained available under the July 19, 2016, share repurchase plan.
During the fiscal year ended October 2, 2015, the Company paid approximately $237.3 million (including commissions) in connection with the repurchase of 2.9 million shares of its common stock (paying an average price of $83.29 per share).
DIVIDENDS
On November 3, 2016, the Company announced that the Board of Directors declared a cash dividend on the Company’s common stock of $0.28 per share. This dividend is payable on December 8, 2016, to the Company’s stockholders of record as of the close of business on November 17, 2016. Future dividends are subject to declaration by the Board of Directors. The dividends charged to retained earnings in fiscal 2016 and 2015 were as follows (in millions except per share amounts):
|
| | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 |
| Per Share | | Total | | Per Share | | Total |
First quarter | $ | 0.26 |
| | $ | 49.8 |
| | $ | 0.13 |
| | $ | 24.7 |
|
Second quarter | 0.26 |
| | 49.3 |
| | 0.13 |
| | 24.9 |
|
Third quarter | 0.26 |
| | 49.5 |
| | 0.13 |
| | 24.8 |
|
Fourth quarter | 0.28 |
| | 52.2 |
| | 0.26 |
| | 49.6 |
|
| $ | 1.06 |
| | $ | 200.8 |
| | $ | 0.65 |
| | $ | 124.0 |
|
EMPLOYEE STOCK BENEFIT PLANS
As of September 30, 2016, the Company has the following equity compensation plans under which its equity securities were authorized for issuance to its employees and/or directors:
| |
• | the 1999 Employee Long-Term Incentive Plan |
| |
• | the Directors’ 2001 Stock Option Plan |
| |
• | the Non-Qualified Employee Stock Purchase Plan |
| |
• | the 2002 Employee Stock Purchase Plan |
| |
• | the 2005 Long-Term Incentive Plan |
| |
• | the AATI 2005 Equity Incentive Plan |
| |
• | the 2008 Director Long-Term Incentive Plan |
| |
• | the 2015 Long-Term Incentive Plan |
Except for the 1999 Employee Long-Term Incentive Plan and the Non-Qualified Employee Stock Purchase Plan, each of the foregoing equity compensation plans was approved by the Company’s stockholders.
As of September 30, 2016, a total of 100.7 million shares are authorized for grant under the Company’s share-based compensation plans, with 4.8 million options outstanding. The number of common shares reserved for future awards to employees and directors under these plans was 19.1 million at September 30, 2016. The Company grants new equity awards under the 2015 Long-Term Incentive Plan to employees, which replaced the 2005 Long-Term Incentive Plan on May 19, 2015, and the 2008 Director Long-Term Incentive Plan for non-employee directors.
2015 Long-Term Incentive Plan. Under this plan, officers, employees, non-employee directors and certain consultants may be granted stock options, restricted stock awards and units, performance stock awards and units and other share-based awards. The plan has been approved by the stockholders. Under the plan, up to 27.1 million shares have been authorized for grant. A total of 18.4 million shares are available for new grants as of September 30, 2016. The maximum contractual term of options under the plan is seven years from the date of grant. Options granted under the plan are exercisable at the determination of the compensation committee and generally vest ratably over four years. Restricted stock awards and units granted under the plan at the determination of the compensation committee generally vest over four or more years. With respect to restricted stock awards, dividends are accumulated and paid when the underlying shares vest. If the underlying shares are forfeited for any reason, the rights to the dividends with respect to such shares are also forfeited. No dividends or dividend equivalents are paid or accrued with respect to restricted stock unit awards or other awards until the shares underlying such awards become vested and are issued to the award holder. Performance stock awards and units are contingently granted depending on the achievement of certain predetermined performance goals and generally vest over three or more years.
2008 Director Long-Term Incentive Plan. Under this plan, non-employee directors may be granted stock options, restricted stock awards and other share-based awards. The plan has been approved by the stockholders. Under the plan a total of 1.5 million shares have been authorized for grant. A total of 0.7 million shares are available for new grants as of September 30, 2016. The maximum contractual term of options granted under the plan is ten years from the date of grant. Options granted under the plan are generally exercisable over four years. Restricted stock awards and units granted under the plan generally vest over one or more years. With respect to restricted stock awards, dividends are accumulated and paid when the underlying shares vest. If the underlying shares are forfeited for any reason, the rights to the dividends with respect to such shares are also forfeited.
Employee Stock Purchase Plans. The Company maintains a domestic and an international employee stock purchase plan. Under these plans, eligible employees may purchase common stock through payroll deductions of up to 10% of their compensation. The price per share is the lower of 85% of the fair market value of the common stock at the beginning or end of each offering period (generally six months). The plans provide for purchases by employees of up to an aggregate of 9.7 million shares. Shares of common stock purchased under these plans in the fiscal years ended September 30, 2016, October 2, 2015, and October 3, 2014, were 0.3 million, 0.3 million, and 0.5 million, respectively. At September 30, 2016, there are 1.0 million shares available for purchase. The Company recognized compensation expense of $4.6 million, $4.7 million and $4.1 million for the fiscal years ended September 30, 2016, October 2, 2015, and October 3, 2014, respectively, related to the employee stock purchase plan. The unrecognized compensation expense on the employee stock purchase plan at September 30, 2016, was $1.5 million. The weighted average period over which the cost is expected to be recognized is approximately four months.
Stock Options
The following table represents a summary of the Company’s stock options:
|
| | | | | | | | | | | | |
| Shares (in millions) | | Weighted average exercise price | | Weighted average remaining contractual life (in years) | | Aggregate intrinsic value (in millions) |
Balance outstanding at October 2, 2015 | 5.4 |
| | $ | 30.08 |
| | | | |
Granted | 0.8 |
| | $ | 82.36 |
| | | | |
Exercised | (1.3 | ) | | $ | 21.14 |
| | | | |
Canceled/forfeited | (0.1 | ) | | $ | 45.49 |
| | | | |
Balance outstanding at September 30, 2016 | 4.8 |
| | $ | 41.35 |
| | 3.9 | | $ | 174.0 |
|
| | | | | | | |
Exercisable at September 30, 2016 | 2.1 |
| | $ | 25.00 |
| | 2.6 | | $ | 108.3 |
|
The weighted-average grant date fair value per share of employee stock options granted during the fiscal years ended September 30, 2016, October 2, 2015, and October 3, 2014, was $26.30, $23.26, and $11.91, respectively. The total grant date fair value of the options vested during the fiscal years ending September 30, 2016, October 2, 2015, and October 3, 2014, was $21.9 million, $16.6 million and $21.8 million, respectively.
Restricted and Performance Awards and Units
The following table represents a summary of the Company’s restricted and performance awards and units:
|
| | | | | | |
| Shares (In millions) | | Weighted average
grant date fair value |
Non-vested awards outstanding at October 2, 2015 | 4.8 |
| | $ | 23.20 |
|
Granted (1) | 1.3 |
| | $ | 84.89 |
|
Vested | (2.4 | ) | | $ | 33.81 |
|
Canceled/forfeited | (0.1 | ) | | $ | 25.73 |
|
Non-vested awards outstanding at September 30, 2016 | 3.6 |
| | $ | 25.01 |
|
(1) includes performance shares granted and earned based on maximum performance under the underlying performance metrics |
The weighted average grant date fair value per share for awards granted during the fiscal years ended September 30, 2016, October 2, 2015, and October 3, 2014, was $84.89, $63.56, and $26.69, respectively. The total grant date fair value of the awards vested during the fiscal years ending September 30, 2016, October 2, 2015, and October 3, 2014, was $197.6 million, $149.0 million and $63.1 million, respectively.
The following table summarizes the total intrinsic value for stock options exercised and awards vested (in millions):
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Options | $ | 68.9 |
| | $ | 170.8 |
| | $ | 101.3 |
|
Awards | $ | 197.6 |
| | $ | 149.0 |
| | $ | 63.1 |
|
Valuation and Expense Information
The following table summarizes pre-tax share-based compensation expense by financial statement line and related tax benefit (in millions):
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Cost of goods sold | $ | 11.3 |
| | $ | 14.5 |
| | $ | 11.3 |
|
Research and development | 32.2 |
| | 45.4 |
| | 36.2 |
|
Selling, general and administrative | 34.5 |
| | 39.9 |
| | 38.5 |
|
Total share-based compensation expense | $ | 78.0 |
| | $ | 99.8 |
| | $ | 86.0 |
|
| | | | | |
Share-based compensation tax benefit | $ | 22.5 |
| | $ | 29.3 |
| | $ | 25.6 |
|
Capitalized share-based compensation expense | $ | 3.7 |
| | $ | 2.3 |
| | $ | 1.7 |
|
The following table summarizes total compensation costs related to unvested share based awards not yet recognized and the weighted average period over which it is expected to be recognized at September 30, 2016:
|
| | | | | |
| Unrecognized compensation cost for unvested awards (in millions) | | Weighted average remaining recognition period (in years) |
Options | $ | 33.5 |
| | 2.0 |
Awards | $ | 63.2 |
| | 1.0 |
The fair value of the restricted stock awards and units is equal to the closing market price of the Company’s common stock on the date of grant.
The Company issued performance share units during fiscal 2016, fiscal 2015 and fiscal 2014 that contained market-based conditions. The fair value of these performance share units was estimated on the date of the grant using a Monte Carlo simulation with the following weighted average assumptions:
|
| | | | | | | | |
| Fiscal Year Ended |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Volatility of common stock | 38.24 | % | | 37.51 | % | | 36.96 | % |
Average volatility of peer companies | 34.76 | % | | 28.42 | % | | 29.59 | % |
Average correlation coefficient of peer companies | 0.49 |
| | 0.55 |
| | 0.47 |
|
Risk-free interest rate | 0.44 | % | | 0.12 | % | | 0.11 | % |
Dividend yield | 1.23 |
| | 0.85 |
| | — | % |
The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:
|
| | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Expected volatility | 42.93 | % | | 45.75 | % | | 47.40 | % |
Risk-free interest rate | 0.98 | % | | 1.33 | % | | 1.83 | % |
Dividend yield | 1.23 |
| | 1.16 |
| | 0.83 |
|
Expected option life (in years) | 4.0 |
| | 4.5 |
| | 4.6 |
|
The Company used a historical volatility calculated by the mean reversion of the weekly-adjusted closing stock price over the expected life of the options. The risk-free interest rate assumption is based upon observed treasury bill interest rates appropriate for the expected life of the Company’s employee stock options. The dividend yield was included in the Black-Scholes option pricing model for options granted after the Company declared its first dividend.
The expected life of employee stock options represents a calculation based upon the historical exercise, cancellation and forfeiture experience for the Company across its demographic population. The Company believes that this historical data is the best estimate of the expected life of a new option and that generally all groups of the Company’s employees exhibit similar behavior.
10. EMPLOYEE BENEFIT PLAN, PENSIONS AND OTHER RETIREE BENEFITS
The Company maintains a 401(k) plan covering substantially all of its employees based in the United States under which all employees at least twenty-one years old are eligible to receive discretionary Company contributions. Discretionary Company contributions in the form of cash are determined by the Board of Directors. The Company has generally contributed a match of up to 4% of an employee’s contributed annual eligible compensation. The Company no longer provides shares of its common stock as contributions to the 401(k) plan and recognized expense of $2.8 million for the fiscal year ended September 30, 2016. For the fiscal years ended October 2, 2015, and October 3, 2014, the Company contributed shares of 0.1 million, and 0.2 million, respectively, and recognized expense of $7.2 million and $6.2 million, respectively.
Defined Benefit Pension:
The Company has a defined benefit pension plan for certain employees in Japan. This plan has been frozen and new employees are not eligible. However, the Company is obligated to make future contributions to fund benefits to the participants with the benefits under the plan being based primarily on a combination of years of service and compensation.
The net amount of the unfunded obligation recognized in other long-term liabilities on the Balance Sheet consists of (in millions):
|
| | | | | | | |
| Fiscal Year Ended |
| September 30,
2016 | | October 2,
2015 |
Pension benefit obligations at the end of the fiscal year | $ | 19.0 |
| | $ | 14.9 |
|
Fair value of plan assets at the end of the fiscal year | 11.4 |
| | 9.8 |
|
Funded status | $ | (7.6 | ) | | $ | (5.1 | ) |
| | | |
Net periodic benefit costs | $ | 0.1 |
| | $ | 0.1 |
|
The pension obligation has an immaterial impact to the Company’s results of operations and financial position and accordingly, the disclosures required have been excluded from this Annual Report on Form 10-K.
11. COMMITMENTS
The Company has various operating leases primarily for buildings, computers and equipment. Rent expense amounted to $19.5 million, $16.5 million, and $11.1 million in the fiscal years ended September 30, 2016, October 2, 2015, and October 3, 2014, respectively. Future minimum payments under these non-cancelable leases are as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total |
Future minimum payments | | $ | 23.9 |
| | 22.0 |
| | 17.0 |
| | 13.2 |
| | 4.7 |
| | 17.3 |
| | $ | 98.1 |
|
In addition, the Company has entered into licensing agreements for intellectual property rights and maintenance and support services. Pursuant to the terms of these agreements, the Company is committed to making aggregate payments of $6.2 million, $0.5 million and $0.1 million in the fiscal years 2017, 2018, and 2019, respectively.
12. CONTINGENCIES
Legal Matters
From time to time, various lawsuits, claims and proceedings have been, and may in the future be, instituted or asserted against the Company, including those pertaining to patent infringement, intellectual property, environmental hazards, product liability and warranty, safety and health, employment and contractual matters.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted and may in the future assert patent, copyright, trademark and other intellectual property rights to technologies that are important to the Company’s business and have demanded and may in the future demand that the Company
license their technology. The outcome of any such litigation cannot be predicted with certainty and some such lawsuits, claims or proceedings may be disposed of unfavorably to the Company. Generally speaking, intellectual property disputes 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 the Company may also be involved in legal proceedings in the ordinary course of business.
The Company monitors the status of legal proceedings and other contingencies on an ongoing basis to ensure amounts are recognized and/or disclosed in its financial statements and footnotes as required. At the time of this filing, the Company recorded an estimated $13.0 million accrual for loss contingencies, which is recorded in other current liabilities as of September 30, 2016. The Company does not believe that the possible range of loss is significantly different than the amount currently accrued. The Company also does not believe there are any additional pending legal proceedings that are reasonably possible to result in a material loss. The Company is engaged in various legal actions in the normal course of business and, while there can be no assurances, the Company believes the outcome of all pending litigation involving the Company will not have, individually or in the aggregate, a material adverse effect on its business.
13. GUARANTEES AND INDEMNITIES
The Company has made no significant contractual guarantees for the benefit of third parties. However, 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 and does not expect that such obligations will have a material adverse impact on its financial condition or results of operations.
14. RESTRUCTURING AND OTHER CHARGES
As of September 30, 2016, the Company recorded restructuring and other charges of approximately $4.8 million primarily related to restructuring plans to reduce redundancies associated with acquisitions during the year. The Company began formulating the plan prior to the date of acquisition. The Company does not anticipate any further significant charges associated with these restructuring activities and substantially all of the remaining cash payments related to these restructuring plans are expected to occur during the next fiscal year.
As of October 2, 2015, the Company recorded restructuring and other charges of approximately $3.4 million related to costs associated with organizational restructuring plans initiated in the fiscal year. The Company does not anticipate any material charges in future periods related to these plans.
As of October 3, 2014, the Company recorded restructuring and other charges of approximately $0.3 million related to costs associated with organizational restructuring plans initiated in the prior fiscal year. The Company does not anticipate any material charges in future periods related to these plans.
Activity and liability balances related to the Company’s restructuring actions are as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Balance at September 27, 2013 | | Current Charges | | Cash Payments | | Balance at October 3, 2014 |
FY13 restructuring programs | | | | | | | |
Employee severance costs | $ | 0.6 |
| | $ | 0.3 |
| | $ | (0.6 | ) | | $ | 0.3 |
|
Other restructuring | | | | | | | |
Employee severance costs, lease and other contractual obligations | 0.4 |
| | — |
| | (0.2 | ) | | 0.2 |
|
Total | $ | 1.0 |
| | $ | 0.3 |
| | $ | (0.8 | ) | | $ | 0.5 |
|
| | | | | | | |
| Balance at October 3, 2014 | | Current Charges | | Cash Payments | | Balance at October 2, 2015 |
FY13 restructuring programs | | | | | | | |
Employee severance costs | $ | 0.3 |
| | $ | — |
| | $ | (0.2 | ) | | $ | 0.1 |
|
Other restructuring | | | | | | | |
Employee severance costs, lease and other contractual obligations | 0.2 |
| | 3.4 |
| | (3.3 | ) | | 0.3 |
|
Total | $ | 0.5 |
| | $ | 3.4 |
| | $ | (3.5 | ) | | $ | 0.4 |
|
| | | | | | | |
| Balance at October 2, 2015 | | Current Charges | | Cash Payments | | Balance at September 30, 2016 |
FY16 restructuring programs | | | | | | | |
Employee severance costs | $ | — |
| | $ | 4.8 |
| | $ | (2.4 | ) | | 2.4 |
|
FY13 restructuring programs | | | | | | | |
Employee severance costs | 0.1 |
| | — |
| | (0.1 | ) | | — |
|
Other restructuring | | | | | | | |
Employee severance costs, lease and other contractual obligations | 0.3 |
| | — |
| | (0.3 | ) | | — |
|
Total | $ | 0.4 |
| | $ | 4.8 |
| | $ | (2.8 | ) | | $ | 2.4 |
|
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share amounts):
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Net income | $ | 995.2 |
| | $ | 798.3 |
| | $ | 457.7 |
|
| | | | | |
Weighted average shares outstanding – basic | 188.7 |
| | 189.5 |
| | 187.2 |
|
Dilutive effect of equity based awards | 3.4 |
| | 5.4 |
| | 5.4 |
|
Weighted average shares outstanding – diluted | 192.1 |
| | 194.9 |
| | 192.6 |
|
| | | | | |
Net income per share – basic | $ | 5.27 |
| | $ | 4.21 |
| | $ | 2.44 |
|
Net income per share – diluted | $ | 5.18 |
| | $ | 4.10 |
| | $ | 2.38 |
|
| | | | | |
Anti-dilutive common stock equivalents | 1.5 |
| | 0.3 |
| | 0.9 |
|
Basic earnings per share are calculated by dividing net income by the weighted average number of shares of the Company’s common stock outstanding during the period. The calculation of diluted earnings per share includes the dilutive effect of equity based awards that were outstanding during the fiscal years ending September 30, 2016, October 2, 2015, and October 3, 2014, using the treasury stock method. Certain of the Company’s outstanding share-based awards, noted in the table above, were excluded because they were anti-dilutive, but they could become dilutive in the future.
16. SEGMENT INFORMATION AND CONCENTRATIONS
The Company considers itself to be a single reportable operating segment which designs, develops, manufactures and markets similar proprietary semiconductor products, including intellectual property. In reaching this conclusion, management considers the definition of the chief operating decision maker (“CODM”), how the business is defined by the CODM, the nature of the information provided to the CODM and how that information is used to make operating decisions, allocate resources and assess performance. The Company’s CODM is the president and chief executive officer. The results of operations provided to and analyzed by the CODM are at the consolidated level and accordingly, key resource decisions and assessment of performance is performed at the consolidated level. The Company assesses its determination of operating segments at least annually.
GEOGRAPHIC INFORMATION
Net revenue by geographic area presented based upon the country of destination are as follows (in millions):
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
United States | $ | 63.3 |
| | $ | 66.8 |
| | $ | 47.5 |
|
Other Americas | 28.8 |
| | 33.0 |
| | 25.5 |
|
Total Americas | 92.1 |
| | 99.8 |
| | 73.0 |
|
| | | | | |
China | 2,324.6 |
| | 2,249.2 |
| | 1,574.4 |
|
Taiwan | 474.2 |
| | 506.9 |
| | 322.2 |
|
South Korea | 94.8 |
| | 100.0 |
| | 107.4 |
|
Other Asia-Pacific | 252.2 |
| | 249.7 |
| | 166.9 |
|
Total Asia-Pacific | 3,145.8 |
| | 3,105.8 |
| | 2,170.9 |
|
| | | | | |
Europe, Middle East and Africa | 51.1 |
| | 52.8 |
| | 47.6 |
|
Total | $ | 3,289.0 |
| | $ | 3,258.4 |
| | $ | 2,291.5 |
|
The Company’s revenues by geography do not necessarily correlate to end market demand by region. For example, the Company’s revenues reflected in the China line item above include sales of products to a company that is not headquartered in China but that manufactures its products in China for sale to consumers throughout the world, including in the United States, Europe, China, and other markets in Asia. The Company’s revenue to external customers is generated principally from the sale of semiconductor products that facilitate various wireless communication applications. Accordingly, the Company considers its product offerings to be similar in nature and therefore not segregated for reporting purposes.
Net property, plant and equipment balances, based on the physical locations within the indicated geographic areas are as follows (in millions):
|
| | | | | | | | | | | |
| As of |
| September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Mexico | $ | 355.9 |
| | $ | 406.1 |
| | $ | 290.1 |
|
Singapore | 180.1 |
| | 89.9 |
| | 60.8 |
|
United States | 140.5 |
| | 148.8 |
| | 138.7 |
|
Japan | 121.6 |
| | 173.8 |
| | 58.8 |
|
Rest of world | 8.2 |
| | 7.8 |
| | 7.5 |
|
| $ | 806.3 |
| | $ | 826.4 |
| | $ | 555.9 |
|
CONCENTRATIONS
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of trade accounts receivable. Trade accounts receivable are primarily derived from sales to manufacturers of communications and consumer products and electronic component distributors. Ongoing credit evaluations of customers’ financial condition are performed and collateral, such as letters of credit and bank guarantees, are required whenever deemed necessary.
In fiscal 2016 and fiscal 2014, Foxconn Technology Group (together with its affiliates and other suppliers to a large OEM for use in multiple applications including smartphones, tablets, routers, desktop and notebook computers, “Foxconn”) and Samsung—each constituted more than ten percent of the Company’s net revenue. In fiscal 2015, Foxconn constituted more than ten percent of the Company’s net revenue.
The Company’s greater than ten percent customers comprised the following percentages of net revenue: |
| | | | | | |
| | Fiscal Years Ended |
| | September 30,
2016 | | October 2,
2015 | | October 3,
2014 |
Company A | | 40% | | 44% | | 34% |
Company B | | 10% | | * | | 10% |
* Customer did not represent greater than ten percent of net revenue | | | | | | |
At September 30, 2016, the Company’s three largest accounts receivable balances comprised 54% of aggregate gross accounts receivable. This concentration was 62% and 58% at October 2, 2015, and October 3, 2014, respectively.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Net income and earnings per share for the first fiscal quarter of 2016 include other income related to the receipt of the PMC merger termination fee as detailed in Note 3, Business Combinations, in these Notes to the Consolidated Financial Statements. The following table summarizes the quarterly and annual results (in millions, except per share data): |
| | | | | | | | | | | | | | | | | | | |
| First quarter | | Second quarter | | Third quarter | | Fourth quarter | | Fiscal year |
Fiscal 2016 | | | | | | | | | |
Net revenue | $ | 926.8 |
| | $ | 775.1 |
| | $ | 751.7 |
| | $ | 835.4 |
| | $ | 3,289.0 |
|
Gross profit | 472.1 |
| | 390.4 |
| | 378.3 |
| | 424.4 |
| | 1,665.2 |
|
Net income | 355.3 |
| | 208.1 |
| | 185.0 |
| | 246.8 |
| | 995.2 |
|
Per share data (1) | | | | | | | | | |
Net income, basic | $ | 1.87 |
| | $ | 1.09 |
| | $ | 0.98 |
| | $ | 1.33 |
| | $ | 5.27 |
|
Net income, diluted | $ | 1.82 |
| | $ | 1.08 |
| | $ | 0.97 |
| | $ | 1.31 |
| | $ | 5.18 |
|
| | | | | | | | | |
Fiscal 2015 | | | | | | | | | |
Net revenue | $ | 805.5 |
| | $ | 762.1 |
| | $ | 810.0 |
| | $ | 880.8 |
| | $ | 3,258.4 |
|
Gross profit | 373.0 |
| | 352.2 |
| | 393.1 |
| | 436.2 |
| | 1,554.5 |
|
Net income | 195.2 |
| | 166.5 |
| | 207.4 |
| | 229.2 |
| | 798.3 |
|
Per share data (1) | | | | | | | | | |
Net income, basic | $ | 1.03 |
| | $ | 0.88 |
| | $ | 1.09 |
| | $ | 1.21 |
| | $ | 4.21 |
|
Net income, diluted | $ | 1.01 |
| | $ | 0.85 |
| | $ | 1.06 |
| | $ | 1.18 |
| | $ | 4.10 |
|
____________
| |
(1) | Earnings per share calculations for each of the quarters are based on the weighted average number of shares outstanding and included common stock equivalents in each period. Therefore, the sums of the quarters do not necessarily equal the full year earnings per share. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures.
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 September 30, 2016. 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 management’s evaluation of our disclosure controls and procedures as of September 30, 2016, 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.
Management’s Annual Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| |
• | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| |
• | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| |
• | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2016. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013 Internal Control-Integrated Framework.
Based on their assessment, management concluded that, as of September 30, 2016, the Company’s internal control over financial reporting is effective based on those criteria.
The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as stated within their report which appears herein.
Changes in internal controls over financial reporting.
There are no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered by this report that have materially affected or are reasonable likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information under the captions “Directors and Executive Officers”, “Corporate Governance─Committees of the Board of Directors” and “Other Matters─Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for the 2017 Annual Meeting of Stockholders is incorporated herein by reference.
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. We make available our code of business conduct and ethics free of charge through our website, which is located at www.skyworksinc.com. We intend to disclose any amendments to, or waivers from, our code of business conduct and ethics that are required to be publicly disclosed pursuant to rules of the SEC and the NASDAQ Global Select Market by posting any such amendment or waivers on our website and disclosing any such waivers in a Form 8-K filed with the SEC.
ITEM 11. EXECUTIVE COMPENSATION.
The information to be included under the caption “Information about Executive and Director Compensation” in our definitive proxy statement for the 2017 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information to be included under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our definitive proxy statement for the 2017 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information to be included under the captions “Certain Relationships and Related Transactions” and “Corporate Governance─Director Independence” in our definitive proxy statement for the 2017 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information to be included under the caption “Ratification of Independent Registered Public Accounting Firm—Audit Fees” in our definitive proxy statement for the 2017 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
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(a) | The following are filed as part of this Annual Report on Form 10-K: |
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1. | Index to Financial Statements | Page number in this report |
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Report of Independent Registered Public Accounting Firm | |
Consolidated Statements of Operations for the Years Ended September 30, 2016, October 2, 2015, and October 3, 2014 | |
Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2016, October 2, 2015, and October 3, 2014 | |
Consolidated Balance Sheets for the Years Ended September 30, 2016, and October 2, 2015 | |
Consolidated Statements of Cash Flows for the Years Ended September 30, 2016, October 2, 2015, and October 3, 2014 | |
Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2016, October 2, 2015, and October 3, 2014 | |
Notes to Consolidated Financial Statements | |
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2. | The schedule listed below is filed as part of this Annual Report on Form 10-K: | Page number in this report |
| Schedule II-Valuation and Qualifying Accounts | |
| All other required schedule information is included in the Notes to Consolidated Financial Statements or is omitted because it is either not required or not applicable. | |
3. | The Exhibits listed in the Exhibit Index immediately preceding the Exhibits are filed as a part of this Annual Report on Form 10-K. | |
The exhibits required by Item 601 of Regulation S-K are filed herewith and incorporated by reference herein. The response to this portion of Item 15 is submitted under Item 15 (a) (3).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 22, 2016
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| | |
| SKYWORKS SOLUTIONS, INC. |
| Registrant |
| | |
| By: | /s/ Liam K. Griffin |
| | Liam K. Griffin |
| | President and Chief Executive Officer |
| | Director |
| | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on November 22, 2016.
|
| | |
Signature and Title | | Signature and Title |
| | |
/s/ Liam K. Griffin | | /s/ David J. Aldrich |
Liam K. Griffin | | David J. Aldrich |
Chief Executive Officer | | Executive Chairman and Chairman of the Board |
President and Director | | |
(principal executive officer) | | /s/ Kevin L. Beebe |
| | Kevin L. Beebe |
/s/ Kris Sennesael | | Director |
Kris Sennesael | | |
Senior Vice President and Chief Financial Officer | | /s/Timothy R. Furey |
(principal accounting and financial officer) | | Timothy R. Furey |
| | Director |
| | |
| | /s/ Balakrishnan S. Iyer |
| | Balakrishnan S. Iyer |
| | Director |
| | |
| | /s/ Christine King |
| | Christine King |
| | Director |
| | |
| | /s/ David P. McGlade |
| | David P. McGlade |
| | Director |
| | |
| | /s/ David J. McLachlan |
| | David J. McLachlan |
| | Director |
| | |
| | /s/ Robert A. Schriesheim |
| | Robert A. Schriesheim |
| | Director |
| | |
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In millions)
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| | | | | | | | | | | | | | | | | | | |
Description |
Beginning balance | | Charged to assets or expenses | |
Deductions | |
Misc. (1) | |
Ending balance |
Year Ended October 3, 2014 | | | | | | | | | |
Allowance for doubtful accounts | $ | 0.5 |
| | $ | 0.2 |
| | $ | 0.1 |
| | $ | — |
| | $ | 0.8 |
|
Reserve for sales returns | $ | 4.7 |
| | $ | 12.7 |
| | $ | (3.3 | ) | | $ | — |
| | $ | 14.1 |
|
Valuation allowance on deferred tax assets | $ | 51.0 |
| | $ | 7.1 |
| | $ | — |
| | $ | 2.7 |
| | $ | 60.8 |
|
Year Ended October 2, 2015 | | | | | | | | | |
Allowance for doubtful accounts | $ | 0.8 |
| | $ | (0.4 | ) | | $ | — |
| | $ | — |
| | $ | 0.4 |
|
Reserve for sales returns | $ | 14.1 |
| | $ | 16.0 |
| | $ | (17.9 | ) | | $ | — |
| | $ | 12.2 |
|
Valuation allowance on deferred tax assets | $ | 60.8 |
| | $ | 3.6 |
| | $ | — |
| | $ | 0.8 |
| | $ | 65.2 |
|
Year Ended September 30, 2016 | | | | | | | | | |
Allowance for doubtful accounts | $ | 0.4 |
| | $ | 0.1 |
| | $ | — |
| | $ | — |
| | $ | 0.5 |
|
Reserve for sales returns | $ | 12.2 |
| | $ | 16.1 |
| | $ | (16.0 | ) | | $ | — |
| | $ | 12.3 |
|
Valuation allowance on deferred tax assets | $ | 65.2 |
| | $ | 13.9 |
| | $ | — |
| | $ | — |
| | $ | 79.1 |
|
(1) Includes acquired balances
EXHIBIT INDEX
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Exhibit Number | Exhibit Description | Form | Incorporated by Reference | Filed Herewith |
File No. | Exhibit | Filing Date |
2.1 | Agreement and Plan of Merger dated as of May 17, 2011 by and among the Company, Silver Bullet Acquisition Corp, SiGe Semiconductor, Inc. and Shareholder Representative Services LLC, solely in its capacity as the representative and agent of the Company Stockholders | 10-Q/A | 001-05560 | 10.E | 11/17/2011 | |
2.2 | Agreement and Plan of Merger dated as of May 26, 2011, by and among the Company, PowerCo Acquisition Corp. and Advanced Analogic Technologies Incorporated | 8-K | 001-05560 | 2.2 | 12/5/2011 | |
2.3 | Amendment No. 1 dated as of November 30, 2011, to Agreement and Plan of Merger, dated as of May 26, 2011, by and among the Company, PowerCo Acquisition Corp. and Advanced Analogic Technologies Incorporated | 8-K | 001-05560 | 2.1 | 12/5/2011 | |
2.4 | Memorandum of Understanding dated as of April 28, 2014, by and between the Company and Panasonic Corporation, acting through Automotive & Industrial Systems Company | 10-Q | 001-05560 | 10.1 | 7/30/2014 | |
2.5 | Stock Purchase Agreement dated as of July 2, 2014, by and among the Company, Skyworks Luxembourg S.A.R.L., Panasonic Corporation, acting through Automotive & Industrial Systems Company, Panasonic Asia Pacific Pte., Ltd. Skyworks Panasonic Filter Solutions Japan Co., Ltd. and Skyworks Panasonic Filter Solutions Singapore Pte. Ltd. | 10-K | 001-05560 | 2.5 | 11/25/2014 | |
3.1 | Restated Certificate of Incorporation, As Amended | 10-Q | 001-05560 | 3.1 | 8/3/2016 | |
3.2 | Second Amended and Restated By-laws, As Amended | 10-Q | 001-05560 | 3.1 | 5/2/2014 | |
4.1 | Specimen Certificate of Common Stock | S-3 | 333-92394 | 4 | 7/15/2002 | |
10.1* | Alpha Industries, Inc. Long-Term Compensation Plan dated September 24, 1990; amended March 28, 1991; and as further amended October 27, 1994 | 10-K | 001-05560 | 10.B | 12/14/2005 | |
10.2* | Alpha Industries Executive Compensation Plan dated January 1, 1995, and Trust for the Alpha Industries Executive Compensation Plan dated January 3, 1995 | 10-K | 001-05560 | 10.D | 12/14/2005 | |
10.3* | Skyworks Solutions, Inc. 1999 Employee Long-Term Incentive Plan | 10-K | 001-05560 | 10.L | 12/23/2002 | |
10.4* | Skyworks Solutions, Inc. Directors’ 2001 Stock Option Plan | 8-K | 001-05560 | 10.2 | 5/4/2005 | |
10.5* | Form of Notice of Stock Option Grant under the Company’s Directors’ 2001 Stock Option Plan | 8-K | 001-05560 | 10.3 | 5/4/2005 | |
10.6* | Skyworks Solutions, Inc. 2002 Employee Stock Purchase Plan | 10-Q | 001-05560 | 10.D | 1/31/2013 | |
10.7* | Skyworks Solutions, Inc. Non-Qualified Employee Stock Purchase Plan | 10-Q | 001-05560 | 10.E | 1/31/2013 | |
10.8* | Skyworks Solutions, Inc. Amended and Restated 2005 Long-Term Incentive Plan | 8-K | 001-05560 | 10.1 | 5/13/2013 | |
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Exhibit Number | Exhibit Description | Form | Incorporated by Reference | Filed Herewith |
File No. | Exhibit | Filing Date |
10.9* | Form of Nonstatutory Stock Option Agreement under the Company’s 2005 Long-Term Incentive Plan | 10-Q | 001-05560 | 10.B | 1/31/2013 | |
10.10* | Form of Performance Share Agreement under the Company’s 2005 Long-Term Incentive Plan | 10-Q | 001-05560 | 10.C | 1/31/2013 | |
10.11* | Form of Restricted Stock Unit Agreement under the Company’s 2005 Long-Term Incentive Plan | 8-K | 001-05560 | 10.1 | 5/9/2014 | |
10.12* | Skyworks Solutions, Inc. Amended and Restated 2008 Director Long-Term Incentive Plan, as Amended | 10-Q | 001-05560 | 10.1 | 5/2/2016 | |
10.13* | Form of Restricted Stock Agreement under the Company’s 2008 Director Long-Term Incentive Plan | 10-Q | 001-05560 | 10.NN | 5/7/2008 | |
10.14* | Form of Nonstatutory Stock Option Agreement under the Company’s 2008 Director Long-Term Incentive Plan | 10-Q | 001-05560 | 10.OO | 5/7/2008 | |
10.15* | Form of Restricted Stock Unit Agreement under the Company’s 2008 Director Long-Term Incentive Plan | 10-Q | 001-05560 | 10.2 | 5/4/2016 | |
10.16* | Skyworks Solutions, Inc. 2015 Long-Term Incentive Plan | 10-Q | 001-05560 | 10.1 | 8/5/2015 | |
10.17* | Form of Nonstatutory Stock Option Agreement under the Company's 2015 Long-Term Incentive Plan | 10-Q | 001-05560 | 10.2 | 8/5/2015 | |
10.18* | Form of Performance Share Agreement under the Company's 2015 Long-Term Incentive Plan | 10-Q | 001-05560 | 10.3 | 8/5/2015 | |
10.19* | Form of Restricted Stock Unit Agreement under the Company's 2015 Long-Term Incentive Plan | 10-Q | 001-05560 | 10.4 | 8/5/2015 | |
10.20* | Advanced Analogic Technologies Incorporated 1998 Amended Stock Plan | 10-K | 001-05560 | 10.CC | 11/21/2012 | |
10.21* | Advanced Analogic Technologies Incorporated 2005 Equity Incentive Plan | 10-K | 001-05560 | 10.DD | 11/21/2012 | |
10.22* | Fiscal 2016 Executive Incentive Plan | 10-Q | 001-05560 | 10.1 | 2/3/2016 | |
10.23* | Skyworks Solutions, Inc. Cash Compensation Plan for Directors | 10-Q | 001-05560 | 10.1 | 5/4/2016 | |
10.24* | Second Amended and Restated Change of Control / Severance Agreement, dated May 11, 2016, between the Company and David Aldrich | 10-Q | 001-05560 | 10.1 | 8/3/2016 | |
10.25* | Letter to the Company from David Aldrich, dated December 16, 2014 | 10-Q | 001-05560 | 10.2 | 2/4/2015 | |
10.26* | Amended and Restated Change in Control / Severance Agreement, dated May 11, 2016, between the Company and Liam Griffin | 10-Q | 001-05560 | 10.2 | 8/3/2016 | |
10.27* | Change in Control / Severance Agreement, dated December 16, 2014, between the Company and Donald Palette | 10-Q | 001-05560 | 10.4 | 2/4/2015 | |
10.28* | Change in Control / Severance Agreement, dated December 16, 2014, between the Company and Bruce Freyman | 10-Q | 001-05560 | 10.5 | 2/4/2015 | |
10.29* | Change in Control / Severance Agreement, dated December 16, 2014, between the Company and Mark Tremallo | 10-Q | 001-05560 | 10.6 | 2/4/2015 | |
10.30* | Change in Control / Severance Agreement, dated December 16, 2014, between the Company and Peter Gammel | 10-K | 001-05560 | 10.31 | 11/24/2016 | |
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Exhibit Number | Exhibit Description | Form | Incorporated by Reference | Filed Herewith |
File No. | Exhibit | Filing Date |
10.31* | Change in Control / Severance Agreement, dated November 9, 2015, between the Company and Laura Gasparini | 10-Q | 001-05560 | 10.3 | 8/3/2016 | |
10.32* | Change in Control / Severance Agreement, dated August 29, 2016, between the Company and Kris Sennesael | | | | | X |
10.33* | Transition Letter, dated August 26, 2016 between the Company and Donald Palette | | | | | X |
21 | Subsidiaries of the Company | | | | | X |
23.1 | Consent of KPMG LLP | | | | | X |
31.1 | Certification of the Company’s Chief Executive Officer pursuant to Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | X |
31.2 | Certification of the Company’s Chief Financial Officer pursuant to Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | X |
32.1 | Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | X |
32.2 | Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | X |
101.INS | XBRL Instance Document | | | | | X |
101.SCH | XBRL Taxonomy Extension Schema Document | | | | | X |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | X |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | | X |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | | | X |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | X |
* Indicates a management contract or compensatory plan or arrangement.