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TMCNet:  SKYWORKS SOLUTIONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

[January 31, 2013]

SKYWORKS SOLUTIONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) This report and other documents we have filed with the Securities and Exchange Commission ("SEC") contain 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 are subject to the "safe harbor" created by those sections. Words such as "believes," "expects," "may," "will," "would," "should," "could," "seek," "intends," "plans," "potential," "continue," "estimates," "anticipates," "predicts," 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 report. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements.



Although forward-looking statements in this 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 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 results to differ materially and adversely from those in the forward-looking statements. We urge you to consider the risks and uncertainties discussed in this Quarterly Report on Form 10-Q and our 2012 Annual Report on Form 10-K for the fiscal year ended September 28, 2012, which was filed with the SEC on November 21, 2012 (the "2012 10-K"), as amended by Amendment No. 1 to the 2012 10-K, filed with the SEC on January 28, 2013, under the heading "Risk Factors" and in the other documents we have filed with the 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 Quarterly Report on Form 10-Q. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.

In this document, the words "we," "our," "ours" and "us" refer only to Skyworks Solutions, Inc. and its subsidiaries and not any other person or entity.

RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 28, 2012 AND DECEMBER 30, 2011.

The following table sets forth the results of our operations expressed as a percentage of our net revenue for the three months ended December 28, 2012 and December 30, 2011: Three Months Ended December 28, December 30, 2012 2011 Net revenue 100.0 % 100.0 % Cost of goods sold 57.6 56.4 Gross profit 42.4 43.6 Operating expenses: Research and development 12.8 11.9 Selling, general and administrative 8.4 10.9 Amortization of intangibles 1.8 1.6 Restructuring and other charges 0.4 0.2 Total operating expenses 23.4 24.6 Operating income 19.0 19.0 Interest expense - (0.1 ) Other income, net 0.1 - Income before income taxes 19.1 18.9 Provision for income taxes 4.5 4.5 Net income 14.6 % 14.4 % 14-------------------------------------------------------------------------------- Table of Contents OVERVIEW We are an innovator of high performance analog semiconductors. Leveraging core technologies, we support automotive, broadband, cellular infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. Our portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics.

NET REVENUE Three Months Ended December 28, December 30, 2012 Change 2011 (dollars in thousands) Net revenue $ 453,723 15.2% $ 393,740 We market and sell our products directly to original equipment manufacturers of communication electronic products, third-party original design manufacturers, and contract manufacturers, and indirectly through electronic components distributors. We periodically enter into revenue generating arrangements that leverage our broad intellectual property portfolio by licensing or selling our non-core patents or other intellectual property. We anticipate continuing this intellectual property strategy in future periods.

We generated net revenue of $453.7 million for the three months ended December 28, 2012, an increase of $60.0 million or 15.2% when compared to $393.7 million for the corresponding period in fiscal 2012. The increase in revenue was primarily driven by our internal development of products and expanded product portfolio supporting new vertical markets including medical, automotive, military and industrial and to a lesser extent, the incremental revenue associated with our acquisition of Advanced Analogic Technologies Inc ("AATI") in fiscal 2012. In addition, we have continued to increase revenue as a result of capturing a higher share of the increasing RF content per device as smartphones continue to displace traditional cellular phones.

GROSS PROFIT Three Months Ended December 28, December 30, 2012 Change 2011 (dollars in thousands) Gross profit $ 192,565 12.1% $ 171,850 % of net revenue 42.4 % 43.6 % Gross profit represents net revenue less cost of goods sold. 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 due to constant product innovations.

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 5 to 10 percent per year. As part of our normal course of business, we mitigate the gross profit margin impact of declining average selling prices with efforts to increase unit volume, reduce materials costs and lower manufacturing costs of existing products and by introducing new and/ or higher value-added products.

Gross profit was $20.7 million greater for the three months ended December 28, 2012 than in the corresponding period in fiscal 2012. The increase in gross profit was the result of higher unit volumes and lower per unit materials and manufacturing costs with an aggregate gross profit benefit of approximately $53.5 million. This benefit was offset by the erosion of our average selling price and changes in product mix having a combined unfavorable impact on gross profit of approximately $32.8 million. As a result, gross profit margin decreased from 43.6% for the three months ended December 30, 2011 to 42.4% for the three months ended December 28, 2012.

During the three months ended December 28, 2012, we continued to benefit from higher contribution margins associated with the licensing and/or sale of intellectual property.

15 -------------------------------------------------------------------------------- Table of Contents RESEARCH AND DEVELOPMENT Three Months Ended December 28, December 30, 2012 Change 2011 (dollars in thousands) Research and development $ 58,054 23.7% $ 46,941 % of net revenue 12.8 % 11.9 % 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 23.7% increase in research and development expenses for the three months ended December 28, 2012, when compared to the corresponding period in fiscal year 2012, is primarily related to higher head count and compensation expense primarily from the acquisition of AATI, and to a lesser extent the increase is attributable to increased internal product design and development activity for our target markets.

SELLING, GENERAL AND ADMINISTRATIVE Three Months Ended December 28, December 30, 2012 Change 2011 (dollars in thousands) Selling, general and administrative $ 38,128 (11.1)% $ 42,909 % of net revenue 8.4 % 10.9 % Selling, general and administrative expenses include legal, 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 and other costs.

Selling, general and administrative expenses decreased by 11.1% for the three months ended December 28, 2012, as compared to the corresponding period in fiscal 2012. The decrease is primarily because of the reduction in overall legal fees which were higher during the three months ended December 30, 2011 due to the acquisition of AATI and was partially offset by increased head count and related compensation expense during the three months ended December 28, 2012.

AMORTIZATION OF INTANGIBLES Three Months Ended December 28, December 30, 2012 Change 2011 (dollars in thousands) Amortization of intangibles $ 8,156 29.2% $ 6,312 % of net revenue 1.8 % 1.6 % The increase in amortization expense for the three months ended December 28, 2012 is primarily related to the intangible assets that were acquired and recognized in connection with our acquisition of AATI during fiscal 2012.

RESTRUCTURING AND OTHER CHARGES Three Months Ended December 28, December 30, 2012 Change 2011 (dollars in thousands) Restructuring and other charges $ 1,644 128.3% $ 720 % of net revenue 0.4 % 0.2 % 16-------------------------------------------------------------------------------- Table of Contents The restructuring and other charges for the three months ended December 28, 2012 are severance costs primarily related to the front-end solutions restructuring plan that was implemented during the period. In addition, we made cash payments related to restructuring activities of approximately $1.1 million during the three months ended December 28, 2012 and expect all cash payments to be completed in fiscal 2013 in all material respects.

During the three months ended December 30, 2011, the Company recorded a $0.7 million restructuring charge related to a plan to reduce redundancies associated with the acquisition of SiGe Semiconductor, Inc. during fiscal 2011.

PROVISION FOR INCOME TAXES Three Months Ended December 28, December 30, 2012 Change 2011 (dollars in thousands) Provision for income taxes $ 20,349 16.0% $ 17,536 % of net revenue 4.5 % 4.5 % We recorded a provision for income taxes of $20.3 million ($17.8 million and $2.5 million for United States and foreign income taxes, respectively) and $17.5 million ($15.5 million and $2.0 million for United States and foreign income taxes, respectively) for the three months ended December 28, 2012 and December 30, 2011, respectively.

The effective tax rate for the three months ended December 28, 2012 was 23.4% as compared to 23.5% for the corresponding period in fiscal 2012. The difference between our year to date effective tax rate of 23.4% and the federal statutory rate of 35% is principally due to the recognition of foreign earnings in lower tax jurisdictions and the domestic production activities deduction, partially offset by an increase in our tax expense related to a change in our reserve for uncertain tax positions.

In January 2013, the United States Congress enacted legislation to retroactively extend the federal research and development tax credit and other tax provisions which had previously expired. The effect of this legislation will be included in the Company's effective tax rate in the second quarter of fiscal year 2013. If this legislation had been enacted in the quarter ended December 28, 2012, the effect would have been to reduce the Company's income tax expense by approximately $7.0 million.

LIQUIDITY AND CAPITAL RESOURCES Three Months Ended December 28, December 30, (dollars in thousands) 2012 2011 Cash and cash equivalents at beginning of period (1) $ 306,293 $ 410,087 Net cash provided by operating activities 147,680 77,232 Net cash used in investing activities (25,616 ) (6,424 ) Net cash used in financing activities (50,819 ) (35,259 ) Cash and cash equivalents at end of period (1) $ 377,538 $ 445,636 _________________________ (1)Excludes restricted cash balances Cash Flow from Operating Activities: Our cash flow from operating activities consists of net income for the period adjusted for certain non-cash items and changes in certain operating assets and liabilities. During the three months ended December 28, 2012, we generated $147.7 million of cash flow from operating activities, an increase of $70.4 million when compared to $77.2 million generated during the three months ended December 30, 2011. The increase in cash flow from operating activities during the three months ended December 28, 2012 was related to higher net income combined with a net cash inflow from changes in operating assets and liabilities in addition to increases in non-cash amortization of intangibles, depreciation and share-based compensation expense. Specifically, the changes in operating assets and liabilities that resulted in sources of cash were: $45.4 million due to the collections of outstanding accounts receivable during the period related prior quarter customer shipments, $17.3 in other current and long-term liabilities primarily related to the timing of tax payments and $3.5 million related to inventory. The offsetting change in operating liabilities was a use of cash of $29.2 million resulting in a decrease to accounts payable due to the timing of vendor payments during the period.

17 -------------------------------------------------------------------------------- Table of Contents Cash Flow from Investing Activities: Our cash flow from investing activities consists of cash paid for acquisitions, net of cash acquired, capital expenditures, cash received from the sale of capital assets and the sale and maturity of investments. Cash flow used in investing activities was $25.6 million during the three months ended December 28, 2012, compared to $6.4 million during the three months ended December 30, 2011. Cash used in investing activities increased due to the strategic investment of $26.4 million in capital expenditures, primarily related to the purchase of manufacturing equipment to support increased production in anticipation of accelerating demand from key customers at our wafer fabrication facility located in Massachusetts and our assembly and test facility in Mexicali, Mexico. During the three months ended December 30, 2011, we invested $6.4 million in capital expenditures. Our uses of cash during the three months ended December 28, 2012 were partially offset by $0.8 million in proceeds received upon the sale of investments.

Cash Flow from Financing Activities: Our cash flows from financing activities consist primarily of cash transactions related to our equity and debt. During the three months ended December 28, 2012, we had net cash outflows from financing activities of $50.8 million, compared to net cash outflows from financing activities of $35.3 million during the three months ended December 30, 2011. During the three months ended December 28, 2012, we had the following significant uses of cash: • $41.7 million related to our repurchase of approximately 1.9 million shares of our common stock pursuant to the share repurchase program approved by our Board of Directors on November 8, 2012, and • $15.2 million related to payroll tax withholdings on the vesting of employee performance and restricted stock awards.

These uses of cash were partially offset by the net proceeds from an excess tax benefit from stock option exercises of $3.1 million and cash payments from employee stock option exercises of $3.0 million during the three months ended December 28, 2012.

Liquidity: Cash and cash equivalent balances (excluding restricted cash which is used to collateralize outstanding letters of credit for insurance and lease obligations) increased by $71.2 million to $377.5 million at December 28, 2012 and was primarily related to the increase in cash from operations. During the three months ended December 28, 2012, we used $41.7 million in cash to repurchase approximately 1.9 million shares of stock and invested $26.4 million in cash in capital expenditures. 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, working capital and other cash requirements for at least the next 12 months. However, we cannot be certain that our cash from operations will be available in the future to fund all of our capital and operating requirements.

In addition, any strategic investments and acquisitions that we may make may require additional capital resources. If we are unable to obtain sufficient cash or capital to meet our capital 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 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 invested cash balances also include time deposits and certificates of deposit.

Our cash, cash equivalents and restricted cash balance of $378.4 million at December 28, 2012 consisted of $216.2 million held domestically and $162.2 million held by foreign subsidiaries. Of the amount of cash, cash equivalents and restricted cash held by our foreign subsidiaries at December 28, 2012, approximately $96.2 million is considered by us to be indefinitely reinvested and would be subject to material tax effects if repatriated.

CONTRACTUAL OBLIGATIONS Our contractual obligations disclosure in our 2012 10-K, as amended by Amendment No. 1 to the 2012 10-K, filed with the SEC on January 28, 2013, have not materially changed since we filed that report.

OFF-BALANCE SHEET ARRANGEMENTS We have no material off-balance sheet arrangements as defined in SEC Regulation S-K- 303(a)(4)(ii).

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2011, the Financial Accounting Standards Board issued technical corrections and improvements to the Accounting Standards Codifications. The guidance will not be effective for us until fiscal 2014. The adoption of the guidance will not have a significant impact or financial position, results of operations or cash flows.

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