Qorvo, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2018, ended September 30, 2017. Comparatives are the corresponding periods ended October 1, 2016. Amounts are in U.S. dollars.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $821.6 million, down 5.0% | $1,462.4 million, down 6.4% |
| Gross profit and margin | $321.0 million; 39.1% versus 36.6% | $557.4 million; 38.1% versus 38.0% |
| Operating income and margin | $49.6 million; 6.0% versus 5.2% | $21.7 million; 1.5% versus 3.3% |
| Net income | $35.9 million versus $11.8 million | $5.3 million versus $6.2 million |
| Diluted earnings per share | $0.27 versus $0.09 | $0.04 versus $0.05 |
| Operating cash flow | $219.9 million versus $250.0 million | $323.5 million versus $309.4 million |
- Quarterly revenue weakness reflected lower demand for cellular RF solutions supporting customers in China. Higher Wi-Fi, defense and aerospace, and cellular base-station demand partly offset the decline.
- Mobile Products (MP) revenue fell 10.7% in the quarter and 13.3% year to date. Infrastructure and Defense Products (IDP) revenue rose 20.7% and 21.3%, respectively. Quarterly segment operating income was $172.9 million for MP and $57.6 million for IDP.
- Gross-margin improvement reflected better yields, product mix, lower depreciation and lower stock compensation, partly offset by higher intangible amortization, selling-price erosion, lower factory utilization, and costs from an air-contamination issue at the Florida facility following Hurricane Irma.
Financial position and capital allocation
- At September 30, cash and cash equivalents were $574.9 million; working capital was approximately $1.185 billion. Cash increased from $545.5 million at fiscal year-end.
- Long-term debt carrying value was $989.7 million, representing $1.0 billion principal of senior notes: $450 million at 6.75% due 2023 and $550 million at 7.00% due 2025. No revolving-credit borrowings were outstanding; the $300 million unsecured facility matures in 2020, and the company reported covenant compliance.
- Six-month investing cash use was $215.2 million, including $192.2 million of capital expenditures. The company expects fiscal 2018 capital expenditures to be below fiscal 2017 as major capacity and cost-saving projects conclude; capital commitments were approximately $55.5 million.
- Six-month financing cash use was $80.1 million, primarily reflecting $88.9 million of share repurchases. The repurchase program had $293.1 million remaining at quarter-end. Approximately $477.4 million of cash was held by foreign subsidiaries; the company said it intended to permanently reinvest undistributed foreign earnings.
Outlook, notable items, and risks
- No specific revenue or earnings forecast is provided. Management expects lower fiscal 2018 capital expenditures than in fiscal 2017.
- A prospective change in estimated useful lives for certain manufacturing equipment reduced depreciation expense by $15.6 million in the quarter and $29.8 million year to date. Management attributed $14.1 million of quarterly net income and $0.10 of quarterly diluted EPS to the change; year-to-date effects were $15.6 million and $0.12 per diluted share. The change is expected to reduce depreciation expense by about $30 million for the remainder of fiscal 2018.
- Cost-reduction actions, including a headcount reduction, generated about $7 million of restructuring charges in the quarter; management estimated another $10 million of charges over the rest of fiscal 2018. Start-up costs for new processes and operations also increased.
- The six-month tax benefit was $9.9 million despite a pretax loss of $4.6 million; the reported effective tax rate was 214.7%, affected by discrete items. These included a $9.3 million year-to-date benefit from stock-compensation tax accounting and a $5.4 million expense from intra-entity asset transfers. Unrecognized tax benefits rose to $98.9 million.
- Risks highlighted include dependence on a limited number of customers, weaker China cellular-RF demand, customer and distributor forecasting and inventory, meeting development and supply commitments for a module for a major customer’s 2018 smartphones, manufacturing yields and capacity, competition and rapid technology change, and tax, foreign-operation, and intellectual-property uncertainties. Management said ordinary-course legal proceedings were not expected to materially affect consolidated financial position or results.
Important facts for investors to verify
- How much of reported profit and margin improvement reflects the useful-life estimate change, and whether yield, utilization, and product-mix gains persist.
- Whether cellular RF demand, particularly demand tied to China-based customers, stabilizes and whether IDP growth offsets MP weakness.
- Progress on the major-customer smartphone module commitments, restructuring actions, and expected remaining charges.
- Capital spending against management’s lower-spending outlook, and the implications of overseas cash concentration and potential repatriation taxes.
- Tax-rate variability, including discrete stock-compensation and intra-entity-transfer effects, and the status of uncertain tax positions.