Skyworks Solutions, Inc. — FY2014 Form 10-K
Business and reporting period. Skyworks designs, manufactures and sells analog and mixed-signal semiconductors, particularly RF and connectivity components, for mobile devices and other markets. Fiscal 2014 ended October 3, 2014 and contained 53 weeks; FY2013 contained 52 weeks. The filing is an annual report, with unaudited quarterly data for Q4.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $2,291.5 million | $1,792.0 million |
| Gross profit / margin | $1,022.7 million / 44.6% | $766.6 million / 42.8% |
| Operating income / margin | $565.2 million / 24.7% | $345.1 million / 19.3% |
| Net income | $457.7 million | $278.1 million |
| Diluted EPS | $2.38 | $1.45 |
| Cash from operations | $772.4 million | $499.7 million |
Revenue grew 27.9%; net income and diluted EPS each increased 64%. Management attributed growth to increased RF and analog content in more complex smartphones, adoption of 3G/4G in emerging markets, tablet demand and broader product offerings. Higher unit volumes and lower per-unit material and manufacturing costs lifted gross margin, partly offset by price erosion and unfavorable product mix. R&D expense was $252.2 million, up 11.4%, but declined to 11.0% of revenue from 12.6%.
Q4 FY2014, unaudited: revenue was $718.2 million, gross profit $324.0 million and net income $174.9 million; diluted EPS was $0.90. Compared with Q4 FY2013, revenue increased from $477.0 million and net income from $84.2 million.
Cash, liquidity and capital allocation
- Cash and cash equivalents ended the year at $805.8 million, up from $511.1 million. Working capital was $1,131.6 million; current assets were $1,429.2 million and current liabilities $297.6 million.
- Capital expenditures were $208.6 million. Investing cash outflow was $357.1 million, including $148.5 million for a 66% controlling interest in the Panasonic SAW-filter joint venture.
- Financing cash outflow was $120.6 million, including $165.7 million of share repurchases and $41.4 million of dividends; employee stock-option proceeds partly offset these outflows.
- The balance sheet reports no borrowing or debt balance. It includes $41.6 million of long-term tax liabilities and $102.2 million of other long-term liabilities, including a $74.0 million present-value obligation related to the Panasonic transaction.
- Management expected cash on hand and operating cash generation to fund anticipated needs for at least the next 12 months. Of foreign cash, $141.9 million was considered indefinitely reinvested and could incur material tax effects if repatriated.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management described expected demand and growth opportunities in connected devices, mobile broadband and diversified analog markets, while noting that established-product selling prices typically decline 5%–10% annually.
- Key risks include semiconductor cyclicality, competitive pricing and rapid product change; customer order cancellations and inventory exposure; manufacturing yield and supply disruptions; and dependence on a small number of customers. Foxconn-related sales represented 34% of revenue and Samsung-related sales 10% as presented in the filing; two customers each exceeded 10% in FY2014.
- Revenue is concentrated in Asia-Pacific: $2,170.9 million, including $1,574.4 million attributed to China by destination. Destination geography may not represent end-market demand.
- The Panasonic transaction’s purchase-price allocation was preliminary. Skyworks may acquire the remaining 34% for a stated $76.5 million, subject to possible foreign-exchange adjustments. FilterCo’s operations had an immaterial effect on FY2014 revenue and net income.
- The effective tax rate was 19.0%, below the 35% U.S. statutory rate, primarily reflecting lower-taxed foreign earnings and other tax benefits. The Singapore tax holiday runs through September 2020 subject to conditions. The IRS audit settlement for FY2011 reduced uncertain tax positions and produced a tax benefit.
- The company recorded no accrual for legal loss contingencies because losses were not considered probable, and stated that pending matters were not reasonably expected to cause a material loss. It nevertheless faces IP litigation and customer indemnification risks.
- Management and the auditor concluded internal control over financial reporting was effective. The assessment excluded FilterCo, representing approximately 9% of consolidated assets at year-end.
Important facts for investors to verify
- How much FY2014 growth and margin improvement came from durable product demand and cost efficiencies versus the extra fiscal week, customer/product mix and seasonal handset demand.
- Current sales and receivables concentration by customer, and the extent to which Foxconn-related sales depend on a large OEM and its product cycles.
- Whether the Panasonic joint venture delivers expected filter supply, integration and cost benefits, and the final purchase accounting and remaining-interest obligation.
- Cash accessibility and potential tax cost of repatriating foreign earnings, alongside future capital spending, dividends and buybacks.
- Developments in product pricing, supply capacity, customer cancellations, manufacturing yields, tax positions and intellectual-property matters.