Skyworks Solutions, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended October 1, 2010 (52 weeks); fiscal fourth quarter ended October 1, 2010. Dollar amounts below are in millions unless stated otherwise. Fiscal 2009 is the prior comparable year.
Business context
Skyworks designs and manufactures analog and mixed-signal semiconductors, principally for cellular handsets and diversified non-handset applications. Its handset products include power amplifiers and front-end modules; its analog portfolio serves infrastructure, automotive, energy management, industrial, medical and military markets. Management attributed FY2010 growth to increased demand for mobile-internet products and market-share gains. Samsung, Nokia and Foxconn each accounted for more than 10% of FY2010 revenue.
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $1,071.8 | $802.6 |
| Gross profit / margin | $456.8 / 42.6% | $318.2 / 39.6% |
| Operating income / margin | $199.7 / 18.6% | $71.7 / 8.9% |
| Net income | $137.3 | $95.0 |
| Diluted EPS | $0.75 | $0.56 |
| Cash from operating activities | $223.0 | $218.8 |
Revenue rose 33.6%; gross profit increased 43.6%, with margin expanding 300 basis points. Management cited manufacturing productivity and yield improvements, lower material costs, capital investment and higher revenue. Operating income rose 178.6%, reflecting stronger gross profit and operating leverage. FY2010 net income included a $57.8 million income-tax provision, compared with a $25.2 million tax benefit in FY2009; the prior-year benefit primarily reflected a reduction in the deferred-tax valuation allowance.
Cash and cash equivalents were $453.3 million at year-end, with $6.1 million of restricted cash. Working capital was $585.5 million. The company reported $50.0 million of short-term debt and $26.7 million principal amount of convertible notes (carrying value $24.7 million), for total debt of approximately $74.7 million. It said the credit facility had been substantially repaid by November 29, 2010; the remaining convertible notes mature in March 2012. Management reported net cash of $378.5 million excluding restricted cash; a separate passage gives $384.6 million when including restricted cash.
Investing cash outflow was $95.3 million, including $88.9 million of capital expenditures; financing cash outflow was $38.6 million. Receivables and inventory increased with higher business activity. The company held an illiquid auction-rate security with a $2.3 million carrying value against $3.2 million par; it warned that a future other-than-temporary impairment would be charged to earnings.
Fourth-quarter performance and changes
FY2010 Q4 revenue was $313.3 million, gross profit $136.2 million and net income $46.8 million; diluted EPS was $0.25. Versus FY2009 Q4, revenue increased from $228.1 million and gross profit from $92.5 million, while net income declined from $58.3 million. The filing does not provide a clear quarter-specific explanation for the net-income decline.
For the full year, revenue rebounded from FY2009’s 6.7% decline, which management linked to macroeconomic weakness and the exit from mobile transceivers. FY2010 research and development expense increased 8.2% to $134.1 million, while SG&A increased 17.4% to $117.9 million; both declined as a share of revenue. Restructuring and other charges were a $1.0 million credit in FY2010, versus $16.0 million of expense in FY2009, following the prior-year workforce reduction and product-area exit.
Outlook, risks and unusual items
- Management expected existing liquidity and operating cash generation to fund operations, R&D, capital expenditures, debt service and working capital for at least 12 months. It expected FY2011 capital spending to be consistent with FY2010 to support projected growth; no revenue or earnings guidance was provided.
- Key risks include semiconductor-industry cyclicality, pricing pressure, rapid technology change, product-development and manufacturing-yield challenges, reliance on external foundries and subcontractors, and a sole-source supplier of epitaxial wafers for GaAs production.
- Customer concentration is material, and sales are geographically concentrated: Asia-Pacific generated $855.9 million, including $628.9 million attributed to China by shipment destination. The company cautions that destination does not necessarily reflect end-market demand.
- Customer orders may be cancelled or deferred, and backlog may not reliably predict revenue. Seasonal handset demand is generally highest in the calendar quarter ending December and lowest in the quarter ending March.
- Tax-related uncertainty includes $19.9 million of gross unrecognized tax benefits and a $25.6 million deferred-tax valuation allowance. Realization of deferred-tax assets depends on future taxable income.
- The company authorized up to $200 million of share repurchases in August 2010. No shares were repurchased under the program during FY2010; by November 29, 2010, it had repurchased 786,400 shares for approximately $18.2 million. It paid no cash dividends and did not anticipate doing so in the foreseeable future.
- Management and the auditor concluded that internal control over financial reporting was effective as of October 1, 2010. The company said no pending litigation was expected to have a material adverse effect.
Important facts for investors to verify
- Whether growth and gross-margin gains persist, particularly given customer concentration and the contribution from intellectual-property licensing and sales.
- The composition and subsequent conversion of year-end receivables and inventory, which increased substantially with business activity.
- Actual FY2011 capital spending, cash generation, debt repayment and the March 2012 convertible-note maturity plan.
- The status and recoverability of deferred-tax assets, valuation allowances and unrecognized tax benefits.
- Whether the illiquid auction-rate security’s value or impairment assessment changes, and the pace and terms of share repurchases.