Skyworks Solutions, Inc. — Fiscal 2011 First Quarter
Reporting period: Three months ended December 31, 2010 (13 weeks), compared with the three months ended January 1, 2010. Amounts are in U.S. dollars; financial statement figures are unaudited. Skyworks designs, develops, manufactures, and markets analog and mixed-signal semiconductors and reports one operating segment.
Financial performance and liquidity
| Metric | Q1 FY2011 | Comparable quarter | Change |
|---|---|---|---|
| Revenue | $335.1 million | $245.1 million | +36.7% |
| Gross profit / margin | $148.5 million / 44.3% | $102.6 million / 41.8% | Margin +2.5 percentage points |
| Operating income / margin | $77.3 million / 23.1% | $42.5 million / 17.3% | Income +81.8% |
| Net income / diluted EPS | $60.9 million / $0.32 | $28.0 million / $0.16 | Net income +117.3% |
| Operating cash flow | $64.8 million | $53.0 million | +$11.8 million |
| Capital expenditures | $33.0 million | $14.7 million | +$18.4 million |
Cash and cash equivalents were $450.1 million at quarter-end, plus $0.7 million of restricted cash. Long-term debt had a $25.1 million carrying value; short-term debt was zero after the company repaid and terminated its $50.0 million credit facility. Management reported net cash of $425.6 million, deducting debt from cash, cash equivalents, and restricted cash. Current assets were $820.6 million and current liabilities $157.1 million.
Material changes and management commentary
- Management attributed revenue growth to market-share gains, broader product revenue, and stronger demand for wireless products serving mobile internet, infrastructure, energy management, and diversified analog applications.
- Margin improvement reflected product mix, manufacturing productivity and yield gains, lower material costs, and capital investment. Operating leverage also improved as expenses grew more slowly than revenue. The prior-year quarter benefited from higher-margin intellectual-property licensing or sales.
- Research and development expense rose 21.2% to $38.5 million, primarily from employee growth and greater product-development activity. Selling, general and administrative expense rose 16.2% to $31.1 million; both costs declined as a percentage of revenue.
- Working capital use increased: receivables rose $25.6 million and inventory rose $17.0 million during the quarter, partly offset by an $8.6 million increase in accounts payable. Investing outflows increased mainly due to higher capital expenditures.
- Financing cash outflows included the $50.0 million credit-facility repayment, $18.4 million of payroll-tax withholding on employee awards, and $18.2 million of share repurchases. These were partly offset by $43.1 million in proceeds from stock-option exercises. The repurchase program had $181.8 million remaining under its $200 million authorization.
Outlook, risks, and unusual items
- Management expected existing liquidity and operating cash generation to fund research and development, capital spending, debt obligations, working capital, and other needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
- The quarter’s 20.7% effective tax rate included $4.4 million of previously earned federal R&D tax credits, retroactively recognized after legislation renewed the credit. The filing says this reduced the rate from 26.5% to 20.7%; the comparable-quarter rate was 31.4%.
- The remaining 1.50% convertible notes had $26.7 million principal due March 2012, with a conversion price of approximately $9.52 per share. The company said it intended to cash-settle principal and interest; the notes’ conversion feature contributed 1.7 million shares to diluted EPS in the quarter.
- Auction-rate securities had $3.2 million par value and a $2.3 million carrying value, classified as Level 3 and with contractual maturities exceeding ten years. Management warned that a future other-than-temporary impairment could result in an earnings charge.
- Tax-related uncertainties include $24.0 million of U.S. and $1.6 million of foreign deferred-tax valuation allowances, and $22.3 million of gross unrecognized tax benefits. Management said no uncertain tax positions were expected to change within 12 months.
- Skyworks launched operations in Singapore and reported a tax holiday effective through September 30, 2020, conditional on meeting employment and investment thresholds. Management cited possible capital needs for future strategic investments or acquisitions. It reported no material litigation expected to adversely affect the company and no significant changes to previously disclosed risk factors.
Investor verification priorities
- Assess whether revenue growth and the 44.3% gross margin are sustainable, given management’s cited demand, mix, and manufacturing improvements.
- Track receivables, inventory, and capital spending to determine whether growth converts into operating cash flow.
- Verify the effect of the one-time $4.4 million tax-credit recognition and the recoverability of deferred tax assets.
- Review the March 2012 convertible-note settlement and potential dilution, along with the remaining repurchase authorization.
- Monitor the valuation and liquidity of the auction-rate securities and compliance with Singapore tax-holiday conditions.