Skyworks Solutions, Inc. — Q3 FY2011 Form 10-Q
Reporting period: Third quarter ended July 1, 2011 (13 weeks); nine-month period ended the same date. Comparisons are with the quarter ended July 2, 2010 and the corresponding nine months. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context and results
Skyworks designs, manufactures and markets analog and mixed-signal semiconductors for wireless, mobile, infrastructure and other applications. It reports one operating segment. Management attributed growth to market-share gains, stronger demand for wireless and mobile-internet products, product diversification and improved manufacturing performance.
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Revenue | $356.1m | $275.4m | $1,016.6m | $758.6m |
| Gross profit / margin | $156.2m / 43.9% | $118.3m / 42.9% | $445.7m / 43.8% | $320.7m / 42.3% |
| Operating income / margin | $72.2m / 20.3% | $53.5m / 19.4% | $217.6m / 21.4% | $134.3m / 17.7% |
| Net income | $51.5m | $34.7m | $162.4m | $90.5m |
| Diluted EPS | $0.27 | $0.19 | $0.85 | $0.50 |
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $243.0m, versus $149.7m in the prior-year period. Investing used $335.2m, including $249.8m net acquisition payments and $85.4m of capital expenditures. Financing used $51.4m.
- Cash and cash equivalents were $309.6m at July 1, 2011, down from $453.3m at October 1, 2010. The company reported net cash, after debt, of $283.9m.
- Current assets were $712.1m and current liabilities $244.3m. Debt carrying value was $25.7m, classified as short-term; principal on the remaining 1.50% convertible notes was $26.7m, due March 2012. The prior $50.0m credit facility was repaid and terminated.
- Inventory increased to $188.8m from $125.1m at fiscal year-end. Goodwill was $672.7m and intangible assets, net, were $96.3m, reflecting acquisitions.
- Management said existing liquidity and expected operating cash generation should cover operating, investment and debt needs for at least 12 months, while cautioning that future capital availability is not assured.
Material changes and unusual items
- Revenue rose 29.3% in the quarter and 34.0% year to date. Gross margin and operating margin improved; management cited higher-margin product mix, factory yields and manufacturing cost reductions, alongside operating leverage.
- Skyworks completed its acquisition of SiGe Semiconductor on June 10 for approximately $279.5m, including contingent consideration. SiGe contributed about $6.5m of revenue; its net-income impact was insignificant. The preliminary allocation included $172.0m of goodwill and $74.3m of intangible assets; purchase accounting remained subject to change.
- A separate optical-components acquisition cost $28.8m net of cash acquired and had an immaterial operating impact.
- Acquisition-related restructuring charges were $1.5m, primarily severance. Management expected approximately $7.0m in annual savings. Intangible amortization increased to $4.0m for the quarter and $7.2m year to date, mainly due to SiGe.
- The company repurchased 2.27m shares for $60.2m during the nine months; $139.8m remained under the $200m authorization at July 1. Share-based compensation was $42.7m year to date.
Outlook, risks and contingencies
- The filing provides no specific revenue or EPS guidance. Management described demand and product-market opportunities positively, but cautioned that interim results are not necessarily indicative of full-year results.
- Skyworks had agreed to acquire Advanced Analogic Technologies (AATI) for nominal consideration of $6.13 per share, with a cash-and-stock structure subject to a price adjustment and an option to pay all cash under specified share-price conditions. Expected net cash outlay was $100m–$120m after acquired cash. Closing remained subject to conditions.
- Two putative shareholder lawsuits challenging the AATI merger were consolidated. The complaints seek to enjoin the merger or obtain other relief; Skyworks said it considered the claims without merit and intended to defend vigorously.
- SiGe contingent consideration was recorded at a $59.4m fair value; the amount depends on a revenue target and is subject to estimation uncertainty. A $3.2m-par auction-rate security was carried at $2.3m; management received scheduled interest and monitored potential impairment.
- Tax-related uncertainties include $26.6m of gross unrecognized tax benefits and valuation allowances, including a preliminary $15.7m allowance on SiGe-acquired foreign deferred tax assets. Management said no uncertain-tax positions were expected to change within 12 months.
- Management cited potential risks from semiconductor demand and competition, intellectual-property claims and possible injunctive relief, acquisition integration and financing needs, currency exposure, and market or credit conditions. It reported no material off-balance-sheet arrangements and no identified impairment indicators.
Important facts for investors to verify
- Whether revenue growth, gross-margin gains and operating leverage continued after the reported quarter, and how much was attributable to product demand versus mix or other factors.
- SiGe integration, final purchase-price allocation, realized synergies, and the outcome of the contingent-consideration revenue target.
- AATI closing status, final cash/share consideration, funding impact and resolution of the shareholder litigation.
- Cash conversion and working-capital trends, particularly the substantial inventory increase and planned capital spending.
- Convertible-note settlement or repayment, tax-asset realizability and unrecognized-tax-benefit developments.