Skyworks Solutions, Inc. — Q3 Fiscal 2012 Form 10-Q
Reporting period: Third quarter ended June 29, 2012 (13 weeks); year-to-date results cover the nine months ended that date. Comparisons are with the three and nine months ended July 1, 2011. Skyworks makes analog semiconductors for wireless and other markets.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Revenue | $389.0 million | $356.1 million | $1,147.5 million | $1,016.6 million |
| Gross profit | $165.3 million | $156.2 million | $489.4 million | $445.7 million |
| Gross margin | 42.5% | 43.9% | 42.7% | 43.8% |
| Operating income | $62.0 million | $72.2 million | $180.8 million | $217.6 million |
| Net income | $49.3 million | $51.5 million | $140.5 million | $162.4 million |
| Diluted EPS | $0.26 | $0.27 | $0.74 | $0.85 |
Revenue increased 9.3% in the quarter and 12.9% year to date. Net margin was 12.7% for the quarter and 12.2% year to date, versus 14.5% and 16.0%, respectively, a year earlier. Nine-month operating cash flow was $234.9 million, compared with $243.0 million. Investing cash flow was negative $272.1 million and financing cash flow negative $45.8 million.
Balance sheet and liquidity
At June 29, 2012, cash and cash equivalents were $327.1 million, down from $410.1 million at September 30, 2011; restricted cash was $0.8 million. Current assets were $829.5 million and current liabilities $239.6 million. Total liabilities were $288.2 million. The company retired its remaining convertible notes, and reported no short-term debt at quarter-end. Cash uses included $229.6 million net of cash acquired for AATI, $63.3 million of capital expenditures and $48.1 million to retire $26.7 million principal of convertible notes.
Material changes and notable items
- Skyworks acquired Advanced Analogic Technologies Inc. (AATI) on January 9, 2012, for approximately $277.3 million. The preliminary purchase-price allocation included $138.7 million of goodwill and $40.2 million of identifiable intangible assets; the allocation was not final. AATI’s operating contribution was described as not significant to reported revenue or net income through June 29.
- Management attributed revenue growth to acquisitions, internally developed products in new vertical markets, and higher RF content in smartphones. Higher volume and lower unit costs supported gross profit, but pricing erosion, product mix, acquired-inventory fair-value charges and higher share-based compensation weighed on margins. Management expects established-product selling prices to decline at a normalized 5%–10% annual rate.
- R&D expense rose 30.1% in the quarter and 28.7% year to date, primarily due to added headcount and compensation following acquisitions and increased product development. Higher amortization also reflected acquired intangible assets.
- Year-to-date results included $7.8 million of restructuring and other charges, primarily related to AATI and SiGe. The company recorded a $5.0 million warranty-claim settlement charge and separately reported contractual-dispute charges; the MD&A cites $5.8 million year to date, while the note describes the warranty charge as $5.0 million.
- A $5.4 million reduction in contingent consideration was recorded as a gain. Skyworks expected to pay approximately $52.9 million for the SiGe earn-out in Q4; its liquidity discussion referred to approximately $54.0 million of contingent consideration substantially payable in that quarter.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management expected cash on hand and operating cash generation to fund operations, R&D, capital expenditures, working capital and acquisition-related contingent consideration for at least the next 12 months, while cautioning that future operating cash may not cover all needs and that acquisitions may require additional capital. Approximately $31.5 million of foreign-subsidiary cash was described as indefinitely reinvested and subject to material tax effects if repatriated.
Risks include semiconductor pricing and product-mix pressure, customer and demand variability, intellectual-property disputes and potential injunctive relief, and uncertainties in tax estimates and deferred-tax-asset realization. A shareholder lawsuit concerning the AATI acquisition remained pending. The company recorded a probable warranty-claim liability and said no additional material losses from that claim or other outstanding litigation were reasonably possible. It reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- How much AATI contributes to revenue and earnings after integration, and whether the preliminary purchase accounting changes.
- Whether gross-margin pressure from pricing, mix and acquisition-related costs moderates as volume and manufacturing efficiencies develop.
- The final amount and timing of the SiGe earn-out and other contingent consideration payments.
- The outcome and potential cost of the AATI shareholder litigation and warranty claim.
- Whether operating cash flow can sustain investment and liquidity needs after the acquisition and debt retirement.