Skyworks Solutions, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016 (52 weeks). The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Skyworks designs, manufactures and sells analog semiconductors for wireless connectivity markets, including smartphones, automotive, industrial and connected-home applications.
Financial results
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $3,289.0 million | $3,258.4 million |
| Gross profit / margin | $1,665.2 million / 50.6% | $1,554.5 million / 47.7% |
| Operating income / margin | $1,118.7 million / 34.0% | $1,023.1 million / 31.4% |
| Net income | $995.2 million | $798.3 million |
| Diluted EPS | $5.18 | $4.10 |
| Cash from operations | $1,095.7 million | $992.8 million |
| Capital expenditures | $189.3 million | $430.1 million |
| Cash and cash equivalents at year-end | $1,083.8 million | $1,043.6 million |
| Working capital at year-end | $1,791.9 million | $1,450.8 million |
FY2016 fourth-quarter revenue was $835.4 million, gross profit was $424.4 million (about 50.8% margin), and net income was $246.8 million. Fourth-quarter diluted EPS was $1.31.
The filing does not present a separate borrowing-debt balance in the balance-sheet data shown. Total liabilities were $314.0 million at year-end, including $71.8 million of long-term tax liabilities and $32.0 million of other long-term liabilities.
Changes versus prior period and notable items
- Revenue rose 0.9% year over year, after 42.2% growth in FY2015. Management cited increased RF and analog content per device, emerging-market adoption of 3G/4G, IoT applications and expansion into other verticals, partly offset by weaker demand for certain smartphone models at a key customer.
- Gross margin increased 2.9 percentage points. Higher unit volumes and lower per-unit material and manufacturing costs benefited gross profit by $177.4 million, partly offset by $66.7 million of ASP erosion and product-mix effects.
- Operating income increased 9.3%. Net income included an $88.5 million PMC-Sierra merger termination fee received in November 2015; the proposed acquisition was terminated. FY2016 net income also benefited from tax items, including a $24.0 million benefit from reducing uncertain tax-position reserves after an IRS audit concluded.
- Cash from operations rose about 10%. Investing cash outflow declined to $250.9 million, while financing cash outflow increased to $804.6 million, largely reflecting $525.6 million of share repurchases and $201.0 million of dividends.
- Skyworks acquired the remaining 34% of its Panasonic filter joint venture for $76.5 million in August 2016, making it wholly owned. It also acquired two businesses for $55.6 million in cash, plus contingent consideration.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expected cash on hand and operating cash flow to fund operations, R&D, capital spending, potential acquisitions, dividends and other needs for at least the next 12 months.
- Management expects established-product average selling prices to decline approximately 5%–10% annually, with mitigation dependent on volume growth, cost reductions, manufacturing efficiency and new products.
- Key exposures include semiconductor cyclicality and smartphone demand, customer concentration (one customer represented 40% of FY2016 revenue; another represented 10%), intense competition and pricing pressure, and reliance on selected suppliers and manufacturing capacity. The three largest accounts receivable balances were 54% of gross receivables.
- Most revenue is attributed geographically to Asia-Pacific, particularly China; geographic sales do not necessarily identify end-market demand. Foreign operations, China-related regulatory and political risks, and dependence on the Singapore tax holiday (effective through September 2020, subject to conditions) are also relevant.
- At September 30, 2016, the company had accrued $13.0 million for loss contingencies and stated that it did not believe additional pending legal matters were reasonably possible to result in a material loss. Legal outcomes, including intellectual-property disputes, remain uncertain.
- Of $476.6 million in foreign cash, $441.2 million was considered indefinitely reinvested and could incur material tax effects if repatriated. The filing reports $1,676.8 million of undistributed foreign earnings intended to remain permanently reinvested.
- The board declared a $0.28-per-share dividend payable in December 2016; future dividends remain subject to board approval and capital availability. A $400 million repurchase authorization approved in July 2016 had $201.4 million remaining at year-end.
Important facts for investors to verify
- Assess earnings and EPS excluding the $88.5 million merger termination fee and evaluate the sustainability of FY2016’s tax benefits.
- Review customer-level exposure, particularly the 40% revenue concentration, and clarify the underlying end-market demand represented by sales recorded in China.
- Track inventory, which increased to $424.0 million from $267.9 million, and determine whether the filter-business ramp converts into sales and cash flow.
- Verify future margin performance against expected ASP declines and the company’s ability to sustain manufacturing yields, cost reductions and product-mix improvements.
- Monitor cash deployment, remaining repurchase capacity, dividend decisions, acquisition-related contingent payments and the tax implications of foreign cash and earnings.
The independent auditor reported that the financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective as of September 30, 2016.