Skyworks Solutions, Inc. — Q3 FY2015 Form 10-Q
Reporting period: The 13-week third quarter ended July 3, 2015; year-to-date results cover nine months. Comparatives are the three and nine months ended June 27, 2014. Skyworks designs and sells analog semiconductors for wireless and other markets, including smartphones, automotive, broadband, industrial and medical.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $810.0 million | $587.0 million | $2,377.6 million | $1,573.2 million |
| Gross profit / margin | $393.1 million / 48.5% | $264.2 million / 45.0% | $1,118.3 million / 47.0% | $698.6 million / 44.4% |
| Operating income / margin | $258.8 million / 31.9% | $148.5 million / 25.3% | $725.5 million / 30.5% | $367.1 million / 23.3% |
| Net income / net margin | $207.4 million / 25.6% | $111.4 million / 19.0% | $569.1 million / 23.9% | $282.8 million / 18.0% |
| Diluted EPS | $1.06 | $0.58 | $2.92 | $1.47 |
- Revenue increased 38% for the quarter and 51.1% year to date. Management attributed growth to rising RF and analog content per device, smartphone replacement of traditional phones, 3G/4G adoption in emerging markets, tablet demand, and expansion into additional markets.
- Quarterly gross profit rose 48.8%; year-to-date gross profit rose 60.1%. Higher unit volumes and lower per-unit materials and manufacturing costs more than offset average selling price erosion and unfavorable product mix.
- Operating expenses were $134.3 million for the quarter and $392.8 million year to date. R&D and SG&A dollars increased, primarily from compensation and product-development costs; their shares of revenue declined as sales grew.
- Effective tax rates were 20.1% for the quarter and 21.8% year to date, versus 25.0% and 22.9%. Lower-taxed foreign earnings, deductions and research credits contributed; a $11.0 million benefit from credits earned in FY2014 was recognized after their extension. The federal research credit had expired after December 31, 2014, and had not been extended as of the filing.
Cash, liquidity and capital allocation
- Nine-month operating cash flow was $760.1 million, up from $572.0 million. Investing used $303.5 million, including $279.3 million of capital expenditures and $24.2 million for acquisitions; financing used $156.4 million.
- Cash and cash equivalents were $1,106.0 million at July 3, 2015, up $300.2 million from October 3, 2014. Current assets were $1,818.1 million and current liabilities $319.0 million. Total liabilities were $476.3 million; the balance sheet presents no borrowings as a separate line item.
- Capital spending supported facility and production-capacity expansions in Mexico, Japan, Singapore and the United States. The company repurchased $126.3 million of stock and paid $73.8 million in dividends during the nine months. A $300 million repurchase authorization had $173.7 million remaining.
- The board declared a $0.26-per-share dividend payable in the fourth fiscal quarter, double the previous $0.13 rate. Cash held by foreign subsidiaries was $321.8 million, of which $273.7 million was considered indefinitely reinvested and could incur material tax effects if repatriated.
- Management expected available cash and operating cash generation to fund requirements for at least 12 months, while noting that future strategic investments or acquisitions could require additional resources. No material off-balance-sheet arrangements were reported.
Changes, outlook and notable items
- Revenue and diluted EPS increased substantially year over year; operating margin expanded by approximately 660 basis points for the quarter and 720 basis points year to date. Management cited scale benefits, partly offset by higher employee compensation.
- Management said established-product average selling prices typically decline 5%–10% annually, with volume growth, cost reductions, manufacturing efficiencies and new products used to mitigate the impact. The filing does not provide numerical revenue or earnings guidance.
- Skyworks consolidated FilterCo, a Panasonic joint venture, with a 66% interest and a purchase option for the remaining 34% after the second anniversary. The balance sheet included a $75.0 million Level 3 purchase obligation; foreign-exchange features and related options had a de minimis earnings impact in the period.
- Skyworks acquired Quantance in May for $6.6 million in cash plus contingent consideration of up to $30.0 million tied to revenue targets through 2017. The acquisition’s effect on results was described as immaterial.
- Restructuring charges were $2.9 million year to date for severance; management did not anticipate future material charges under the plan. No impairment indicators were identified.
- Legal matters include potential intellectual-property and other claims. No legal-loss accrual was recorded because losses were not considered probable, and management did not believe pending matters were reasonably likely to cause a material loss. Tax audits were ongoing, with no material impact expected. Previously disclosed risk factors had no material changes.
Important facts for investors to verify
- Whether exceptional revenue and margin growth can persist as smartphone demand, product mix and new-market adoption change.
- How pricing erosion of 5%–10% annually and manufacturing cost or volume trends affect future gross margins.
- Execution and returns on the large capacity-expansion program and the elevated capital expenditure level.
- The timing, settlement amount and foreign-exchange exposure of the FilterCo purchase option, and Quantance contingent consideration outcomes.
- Whether federal research tax credits are renewed and how tax audits, uncertain tax positions and potential repatriation taxes develop.