Skyworks Solutions, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2017, ended June 30, 2017. The quarter comprised 13 weeks; comparisons are with the 13 weeks ended July 1, 2016. Amounts are in millions except per-share data.
Business context and results
Skyworks supplies analog semiconductors for wireless and connected-device applications, including smartphones, automotive, broadband, industrial and medical markets. Management attributed revenue growth to greater RF and analog content per device, emerging-market adoption of 3G/4G, IoT applications and expansion into new verticals.
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Revenue | $900.8 | $751.7 | $2,666.8 | $2,453.6 |
| Gross profit | $453.6 | $378.3 | $1,342.9 | $1,240.8 |
| Gross margin | 50.4% | 50.3% | 50.4% | 50.6% |
| Operating income | $304.8 | $238.6 | $907.9 | $826.8 |
| Net income | $246.2 | $185.0 | $728.9 | $748.4 |
| Diluted EPS | $1.32 | $0.97 | $3.90 | $3.87 |
Cash flow, liquidity and capital
- Operating cash flow for the nine months was $1,045.9, up from $640.7 a year earlier. Capital expenditures were $218.0; investing cash outflow was $228.5.
- Financing cash outflow was $457.2, including $330.5 of share repurchases and $155.7 of dividends. Cash increased by $360.2 to $1,444.0 at June 30, 2017.
- Current assets were $2,412.0 and current liabilities $300.8, implying substantial reported short-term liquidity. Total liabilities were $412.4; the filing does not disclose borrowings or a debt balance.
- Cash included $689.2 held by foreign subsidiaries and considered indefinitely reinvested; repatriation to the U.S. would have material tax effects. Management expected cash on hand and operating cash generation to cover requirements for at least 12 months, while noting future acquisitions or other needs could require additional capital.
Material changes and notable items
- Q3 revenue rose 19.8% year over year; nine-month revenue rose 8.7%. Q3 gross margin edged up 0.1 percentage point, while the nine-month margin declined 0.2 point.
- Q3 operating margin improved to 33.9% from 31.7%. Nine-month operating income increased, but net income fell 2.6% as the prior-year nine-month period included an $88.5 merger termination fee from the abandoned PMC-Sierra transaction. That fee did not recur in FY2017.
- Q3 diluted EPS increased to $1.32 from $0.97; nine-month diluted EPS was $3.90 versus $3.87. Lower weighted-average share counts contributed to per-share performance.
- Management said established-product average selling prices typically erode 5%–10% annually. In Q3, higher volumes, lower unit costs and favorable mix more than offset price erosion; for the nine months, price erosion and mix partly offset volume and cost benefits.
- Cash returns continued: 3.7 million shares repurchased for $330.5 during the nine months, with $275.9 remaining under the $500.0 authorization at June 30. A $0.32-per-share dividend was declared July 20, payable August 29, 2017.
- A business acquisition closed during the period for $13.7 net cash consideration plus contingent payments; total consideration had an estimated fair value of $24.8. Its contribution to revenue and net income was not significant. Contingent consideration could range from zero to $20.0.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management cited typical seasonal strength in the second half of the calendar year from consumer-electronics production, and a seasonally weaker second fiscal quarter.
- Key risks include ongoing semiconductor price erosion, competition and product-mix changes; potential intellectual-property disputes, including the possibility of injunctive relief; and foreign-exchange exposure through some operating costs. Management reported no material change to previously disclosed risk factors.
- No legal-loss accrual was recorded because losses were not considered probable; the company said it did not believe pending matters were reasonably likely to result in a material loss. It also reported no material off-balance-sheet arrangements.
- The effective tax rate was 19.7% for Q3 and 19.8% year to date. A Canadian tax audit settlement produced a $1.2 tax benefit in FY2017. Management was evaluating forthcoming accounting standards, including revenue recognition and leases.
- Management concluded disclosure controls were effective as of June 30, 2017, and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and operating margins can be sustained as annualized product-price erosion continues.
- How customer demand, smartphone product cycles, emerging markets and newer verticals contribute to future sales and inventory needs.
- Cash-generation quality: operating cash flow benefited from working-capital timing, including payables and other liabilities; inventory increased by $58.7 during the nine months.
- Use of cash for repurchases, dividends and capital investment, and the availability and tax consequences of overseas cash.
- Final purchase accounting and revenue-linked contingent payments for the acquisition, as well as developments in legal and tax contingencies.