Skyworks Solutions, Inc. — Q2 FY2014 Form 10-Q
Reporting period: Second quarter and six months ended March 28, 2014; comparative periods ended March 29, 2013. Fiscal Q2 comprised 13 weeks. Amounts are in millions of dollars except per-share data.
Business context and results
Skyworks designs high-performance analog semiconductors for wireless and other markets, including smartphones, tablets, automotive, industrial, medical and infrastructure. Management attributed growth to increased RF and analog content per device, smartphone and tablet demand, and expansion into adjacent markets.
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Revenue | $481.0 | $425.2 | $986.2 | $878.9 |
| Gross profit | $212.4 | $176.7 | $434.4 | $369.3 |
| Gross margin | 44.2% | 41.6% | 44.0% | 42.0% |
| Operating income | $102.6 | $68.7 | $218.6 | $155.3 |
| Operating margin | 21.4% | 16.3% | 22.1% | 17.7% |
| Net income | $76.9 | $61.7 | $171.4 | $128.2 |
| Diluted EPS | $0.40 | $0.32 | $0.89 | $0.66 |
Financial position and cash flows
- Six-month operating cash flow was $373.0, versus $277.9 a year earlier. Capital expenditures were $58.2, implying operating cash flow less capital expenditures of approximately $314.8.
- Cash and cash equivalents rose to $797.8 from $511.1 at September 27, 2013. Current assets were $1,268.9 and current liabilities $182.8.
- Total liabilities were $243.2; the balance sheet reports no borrowings or debt. Stockholders’ equity was $2,291.4.
- Six-month cash uses included $78.6 for share repurchases and $18.6 for payroll-tax withholding on equity awards. Capital spending supported increased manufacturing capacity.
Material changes and unusual items
- Q2 revenue grew 13.1% and six-month revenue 12.2% year over year. Gross and operating margins improved, which management attributed to higher volume, favorable product mix, lower per-unit costs and operating leverage; employee compensation expense partly offset gains.
- Restructuring charges were zero in the current quarter and six-month period, versus $4.8 and $6.4, respectively, in the prior-year periods.
- The effective tax rate increased to 25.0% for Q2 and 21.6% year to date, from 8.3% and 16.9%. The current-period rate reflected, among other factors, the expiration of the federal R&D tax credit; a $4.5 Mexico deferred-tax benefit partly offset tax expense from uncertain tax positions. The prior-year tax expense included an approximately $9.1 benefit from tax legislation.
- Management expects established-product average selling prices to decline at a normalized 5%–10% annually, with volume, cost reductions, manufacturing efficiencies and new products used to mitigate the effect.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management said cash on hand and expected operating cash generation should fund R&D, capital expenditures, the planned acquisition, working capital and dividends for at least the next 12 months, while noting future cash availability is not assured.
- On April 28, 2014, after quarter-end, Skyworks and Panasonic signed an MOU for a joint venture involving Panasonic’s SAW and TC SAW filter business. Skyworks expects to pay $148.5 in cash for 66%; after two years it may acquire, and Panasonic may require it to acquire, the remaining 34% for $76.5, subject to adjustments. Closing was expected before fiscal Q4 end, subject to agreements, regulatory approvals and other conditions.
- The board declared the first quarterly dividend, $0.11 per share, payable May 22, 2014. Future dividends remain subject to board approval and capital needs; continuity is not assured.
- Risks include semiconductor price erosion, seasonal demand, intellectual-property disputes that could result in injunctive relief, tax examinations, and foreign-exchange exposure. The company reported no material pending litigation loss considered reasonably possible and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the Panasonic joint venture closed, its final terms and funding, and the resulting accounting and operating contribution.
- Whether revenue growth, product mix and manufacturing-cost improvements persist as selling prices decline and demand remains seasonal.
- The effect of the expired R&D tax credit, uncertain tax positions and ongoing tax examinations on future effective tax rates and cash taxes.
- Future capital spending, share repurchases and dividend declarations, including the amount of foreign cash that could incur material tax costs if repatriated.