Qorvo, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2018, ended December 30, 2017. Comparisons are with the periods ended December 31, 2016. Qorvo supplies radio-frequency semiconductor products through Mobile Products (MP) and Infrastructure and Defense Products (IDP).
Financial results
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $845.7 million | $826.3 million | $2,308.2 million | $2,389.6 million |
| Gross margin | 39.8% | 37.6% | 38.7% | 37.8% |
| Operating income | $80.3 million | $61.4 million | $102.1 million | $112.5 million |
| Net loss | $33.1 million | $78.6 million | $27.8 million | $72.5 million |
| Diluted loss per share | $0.26 | $0.62 | $0.22 | $0.57 |
| Cash from operations | $270.1 million | $220.4 million | $593.6 million | $529.7 million |
- Q3 operating margin was 9.5%, versus 7.4% a year earlier. Nine-month operating margin was 4.4%, versus 4.7%.
- Q3 segment revenue: MP $642.1 million, down 2.2%; IDP $202.7 million, up 20.2%. Nine-month MP revenue fell 9.5% to $1,728.7 million, while IDP rose 21.0% to $576.5 million.
- Cash and cash equivalents were $841.3 million at quarter-end; working capital was approximately $1,429.6 million. Current liabilities were $384.5 million.
- Long-term debt was $1,088.7 million. Qorvo had $100 million drawn under its new term loan and no borrowings under its revolving facility. It also had $300 million of revolving capacity and up to $300 million remaining available under the delayed-draw term loan, subject to facility terms.
- Nine-month capital expenditures were $237.7 million; operating cash flow less capital expenditures was approximately $355.9 million. Q3 capital expenditures were $45.5 million.
Changes and drivers
- Q3 revenue rose 2.3%, supported by demand from Qorvo’s largest customer and growth in defense, aerospace and Wi-Fi products; weaker cellular RF demand from China-based customers partly offset gains. Nine-month revenue declined 3.4%, primarily reflecting weaker China-related cellular RF demand.
- Q3 gross margin improved on product mix and lower depreciation, partly offset by higher intangible amortization, selling-price erosion and lower factory utilization. Nine-month margin also benefited from improved yields on certain products.
- Q3 operating income increased 30.9%, although nine-month operating income decreased 9.3%. Higher nine-month IDP results did not fully offset lower MP revenue and increased other operating expenses.
- Cash from operations increased year over year for the nine-month period, primarily because of the timing of value-added tax collections. Lower capital spending reduced investing cash outflow.
Outlook, risks and unusual items
- The filing gives no specific quantitative revenue or earnings guidance. Management said existing cash, operating cash flow and credit-facility resources were expected to be sufficient for short- and long-term requirements, while cautioning that demand changes could affect funding needs.
- The Tax Cuts and Jobs Act produced a provisional net tax expense of $95.9 million in Q3: a $139.5 million deemed-repatriation tax charge, partly offset by a $43.6 million benefit from remeasuring U.S. deferred taxes. The estimates could change during the permitted measurement period. Qorvo had not finalized its accounting policy or estimated adjustments for GILTI; management expects those rules to raise future effective tax rates, with cash-payment timing partly mitigated by tax provisions and credits.
- A change in estimated useful lives for certain machinery reduced depreciation expense by $15.6 million in Q3 and $45.4 million for the nine months. Management reported that this increased operating income by $15.4 million and $32.7 million, respectively, and improved EPS by $0.12 and $0.24. The change is prospective and is expected to reduce depreciation further in the remainder of fiscal 2018.
- Restructuring actions generated Q3 charges of approximately $8.2 million and asset-disposal losses of $6.7 million. The company expected approximately $1.8 million of additional restructuring charges.
- Key disclosed risks include dependence on a limited number of customers; meeting development, supply and quality commitments for a module for the largest customer’s 2018 smartphones; demand forecasting and inventory risks; manufacturing yields and capacity; competition and product transitions; and tax-law uncertainty. Management said ordinary-course legal matters were not expected to have a material adverse effect. The company was in compliance with its credit-facility covenants.
Important facts for investors to verify
- How much Qorvo’s results depend on its largest customer and whether it meets the related 2018 smartphone-module commitments.
- Whether provisional Tax Act accounting, including repatriation and GILTI impacts, changes as estimates are finalized.
- How much reported margin and earnings benefit from the useful-life estimate change, and whether operating performance remains strong excluding that benefit.
- Whether IDP growth can offset continued weakness or customer concentration in MP, particularly demand from China-based customers.
- Remaining restructuring costs, planned capital spending, and compliance with debt covenants as borrowing and interest-rate exposure evolve.