SWKS

Business Context and Reporting Period

Company: Skyworks Solutions, Inc. (formerly Alpha Industries, Inc.)
Reporting Period: Quarter and nine months ended June 28, 2002 (Fiscal 2002 Q3).
Key Event: On June 25, 2002, the Company completed a reverse acquisition merger with the wireless business of Conexant Systems, Inc. (Washington Sub, Inc.). The financial statements reflect the historical results of the Conexant wireless business (Washington/Mexicali) for all periods presented, with Alpha's results included only from the acquisition date.

Key Financial Metrics

Liquidity: Working capital deficit of approximately $101.6 million as of June 30, 2002, compared to a surplus of $60.5 million at September 30, 2001. Net cash used in operating activities was $39.7 million for the nine months ended June 30, 2002.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues from third parties increased 142.1% for the quarter and 79.9% for the nine months compared to the prior year, driven by renewed demand for GSM products and power amplifier modules.
• Margin Improvement: Gross margin improved significantly from negative margins in the prior year to 17.8% (quarter) and 21.3% (nine months), aided by higher utilization and the sale of previously written-down inventory.
• Special Charges: The period included significant non-recurring charges:
  • Asset Impairments: $66.0 million for Mexicali assembly/test machinery and $45.8 million for the write-off of Philsar Bluetooth goodwill.
  • Purchased IPR&D: $65.5 million expensed immediately related to the Alpha acquisition.
  • Restructuring: Approximately $3.0 million for workforce reductions and facility consolidation.
• Debt Structure: The Company assumed $150 million in short-term promissory notes payable to Conexant for the purchase of the Mexicali operations, a new liability not present in the prior period.

Guidance, Outlook, and Risks

Outlook: Management anticipates continued negative cash flows from operations in the near term due to underutilized manufacturing capacity and cyclical market conditions. The Company expects to require substantial revenue growth to return to profitability.

Capital Needs: The Company must raise capital within the next nine months to satisfy working capital needs and repay the $150 million Conexant note. Proceeds from asset sales or new debt/equity issuances must be used to prepay the note. A $100 million revolving credit facility from Conexant is available but currently unutilized.

Key Risks:

• Customer Concentration: Samsung Electronics accounted for 45% of third-party revenues for the nine months ended June 30, 2002.
• Market Cyclicality: The wireless semiconductor industry is subject to rapid demand fluctuations, price erosion, and inventory corrections.
• Accounting Changes: Adoption of SFAS 142 (Goodwill) in October 2002 may result in a substantial transitional impairment charge on approximately $906.5 million of goodwill.
• Supply Agreements: "Take or pay" commitments with the Newport Beach foundry joint venture are expected to result in excess costs of approximately $13.3 million.

Investor Verification Checklist

• Debt Maturity: Verify the repayment schedule for the $150 million Conexant note (50% due March 2003, 50% due June 2003) and the Company's plan to refinance or repay it.
• Customer Dependency: Assess the risk associated with Samsung Electronics representing 45% of third-party revenue.
• Impairment Assumptions: Review the discounted cash flow assumptions (24% discount rate) used to justify the $66 million Mexicali impairment charge.
• Future Cash Flow: Monitor the Company's ability to generate positive operating cash flow given the projected negative cash flow outlook and high fixed costs.
• Goodwill Valuation: Evaluate the potential impact of the upcoming SFAS 142 transitional impairment test on the $904 million goodwill balance.