Skyworks Solutions, Inc. — Q2 FY2011 10-Q
Reporting period: The 13-week second quarter ended April 1, 2011; comparable quarter ended April 2, 2010. Six-month figures cover the six months ended on those respective dates. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Skyworks designs, develops, manufactures, and markets analog and mixed-signal semiconductors for wireless, infrastructure, energy management, industrial, and other applications. It reports one operating segment. Management attributed growth to increased market share, product diversification, and demand for wireless products supporting mobile internet devices and other markets.
Financial results
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Revenue | $325.4 | $238.1 | $660.5 | $483.2 |
| Gross profit | $141.0 | $99.9 | $289.5 | $202.4 |
| Gross margin | 43.3% | 41.9% | 43.8% | 41.9% |
| Operating income | $68.1 | $38.3 | $145.4 | $80.8 |
| Operating margin | 20.9% | 16.0% | 22.0% | 16.8% |
| Net income | $50.0 | $27.7 | $110.8 | $55.8 |
| Diluted EPS | $0.26 | $0.15 | $0.58 | $0.31 |
- Revenue increased 36.7% in both the quarter and six-month period year over year. Gross margin expanded 1.4 percentage points in Q2 and 1.9 points for six months.
- Management cited improved product mix, manufacturing productivity and yields, lower material costs, and margin-enhancing capital expenditures as drivers of gross-margin improvement. Operating income also benefited from operating leverage.
- Research and development expense rose 23.6% in Q2 and 22.4% for six months, primarily due to employee growth and increased product-development activity. Selling, general and administrative expense rose 13.2% and 14.6%, respectively, but declined as a share of revenue.
- Six-month operating cash flow was $157.0, versus $113.2 a year earlier. Investing cash outflow was $69.7, including $65.3 of capital expenditures; financing cash outflow was $36.8. Cash and cash equivalents increased to $503.8 from $453.3 at October 1, 2010.
- At April 1, 2011, cash, cash equivalents, and restricted cash totaled approximately $504.5; debt carrying value was $25.4, all current. Net cash was approximately $479.1. Total assets were $1,678.8 and stockholders’ equity was $1,476.4.
Changes, capital allocation, and outlook
- The company repaid and terminated its $50.0 receivables-backed credit facility during the first quarter. Remaining convertible notes had $26.7 principal outstanding and a $25.4 carrying value; they mature in March 2012. Their disclosed “if converted” value was $88.1 at the period-end share price, with cash settlement management’s stated intention.
- During the six months, Skyworks repurchased 1.52 million shares for $41.6 under its $200.0 authorization; $158.5 remained available. It also used $18.8 for payroll-tax withholding on employee stock awards.
- Management said available liquidity and expected operating cash flow should fund operating needs, capital expenditures, debt obligations, and working capital for at least 12 months. The filing provides no specific revenue or earnings guidance.
- Management reported no currently anticipated supply disruption from the Japan earthquakes, citing inventory, multiple suppliers, and alternate sources, but said it continued to monitor uncertainty.
Risks, contingencies, and unusual items
- Management reported no significant change in the risk factors from the FY2010 Form 10-K. It identified potential exposure to intellectual-property disputes and other ordinary-course claims, while stating that no pending litigation was expected to have a material adverse effect.
- Skyworks held auction-rate securities with $3.2 par value and $2.3 carrying value, classified as Level 3; a future other-than-temporary impairment could affect earnings. Management reported no impairment indicators for goodwill or other long-lived assets in the period.
- The six-month tax provision included $4.8 of research and development credits earned in FY2010 after retroactive legislative reinstatement. A $24.0 U.S. and $1.6 foreign deferred-tax valuation allowance remained; gross unrecognized tax benefits were $23.8.
- Inventory rose to $151.2 from $125.1 at October 1, 2010, including finished goods increasing to $49.2 from $20.2. Management attributed working-capital investment to higher business activity.
- Share-based compensation expense increased to $28.1 for six months from $16.8, including higher performance-share expense. The company cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether demand, market-share gains, and diversified product growth continue, and whether gross-margin improvement is sustainable.
- Inventory growth and working-capital conversion relative to sales and operating cash flow.
- Cash requirements for capital expenditures and the March 2012 convertible-note maturity, including intended settlement method.
- Progress of share repurchases and the effect of employee equity compensation on diluted shares.
- Tax-credit realization, valuation allowances, and exposure from unrecognized tax benefits.
- Developments in Japan-related supply conditions and the valuation or liquidity of the auction-rate securities.