Skyworks Solutions, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended April 3, 2015; comparisons are to the periods ended March 28, 2014. Skyworks designs and sells analog semiconductors for wireless and other markets, including smartphones, tablets, automotive, industrial, medical, and broadband applications. Amounts below are in millions except per-share data.
Financial results
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $762.1 | $481.0 | $1,567.6 | $986.2 |
| Gross profit / margin | $352.2 / 46.2% | $212.4 / 44.2% | $725.2 / 46.3% | $434.4 / 44.0% |
| Operating income / margin | $219.9 / 28.9% | $102.6 / 21.4% | $466.7 / 29.7% | $218.6 / 22.1% |
| Net income | $166.5 | $76.9 | $361.7 | $171.4 |
| Diluted EPS | $0.85 | $0.40 | $1.86 | $0.89 |
| Operating cash flow | Not separately provided | Not separately provided | $538.2 | $373.0 |
Six-month investing cash outflow was $189.3, including $171.2 of capital expenditures and $18.1 for the FilterCo working-capital adjustment. Financing cash outflow was $100.5, including $79.1 of share repurchases and $49.3 of dividends, partly offset by option-related proceeds and tax benefits. Cash increased $248.4 to $1,054.2 from October 3, 2014. Current assets were $1,678.9 and current liabilities $298.6. Total liabilities were $449.7; the balance sheet does not show a separate interest-bearing debt line item.
Changes and drivers
- Revenue rose 58.4% in the quarter and 59.0% year to date. Management attributed growth to higher RF and analog content per device, smartphone adoption, demand in emerging markets for 3G/4G, tablets, and expansion into new end markets.
- Gross margin improved 2.0 percentage points for the quarter and 2.3 points year to date. Higher volume and lower per-unit materials and manufacturing costs outweighed the combined adverse effects of average selling-price erosion and product mix.
- Operating margin increased about 750 basis points for the quarter and 760 basis points year to date, reflecting revenue growth and operating leverage, partly offset by higher employee compensation.
- R&D and SG&A expenses increased in dollars, primarily from compensation and product-development costs, and legal and acquisition-related costs, but declined as a share of revenue.
Liquidity, outlook, and risks
- Management expected cash on hand and operating cash generation to fund operations, R&D, capital expenditures, potential acquisitions, and other requirements for at least 12 months. Of $318.3 held by foreign subsidiaries, $267.8 was considered indefinitely reinvested and could incur material tax effects if repatriated.
- Capital spending supported expansion of the Mexicali assembly and test facility and manufacturing capacity for FilterCo and U.S. wafer fabrication. The filing gives no numerical revenue or earnings guidance.
- Management cited typical established-product average selling-price declines of 5%–10% annually, which it seeks to offset through volume growth, cost reductions, manufacturing efficiencies, and new products. The company also noted seasonal demand patterns, with typical strength in the second half of the calendar year.
- Federal R&D tax credits expired after December 31, 2014; Congress had not extended them as of the reporting date. Prior-year credits of $7.0 million reduced FY2015 tax expense. The six-month effective tax rate was 22.7%, versus 21.6% a year earlier.
- FilterCo’s remaining 34% interest is subject to a purchase option exercisable by either party after the second anniversary; the associated settlement includes foreign-exchange exposure. The company held yen options intended to offset this exposure.
- The company reported no material change in previously disclosed risk factors, no material off-balance-sheet arrangements, and no recorded accrual for legal loss contingencies. It warned that intellectual-property disputes can involve injunctive relief. No impairment indicators were identified.
Unusual items and capital returns
Restructuring charges were $1.1 in the quarter and $2.4 year to date, principally severance from an internal reorganization; management did not anticipate further material charges. The FilterCo purchase-price allocation remained subject to the measurement period. The board authorized up to $300.0 of repurchases; $220.9 remained available at April 3, 2015. The company paid dividends of $0.26 per share during the first half and announced another $0.13-per-share dividend on April 30, payable June 4, 2015.
Important facts for investors to verify
- Whether rapid revenue and margin growth is sustained and how product mix and selling-price declines affect future gross margins.
- Expected returns and timing of the expanded manufacturing capacity and elevated capital expenditures.
- Cash availability and potential tax cost of repatriating foreign-held funds.
- Terms, timing, and foreign-exchange sensitivity of the FilterCo purchase option and remaining purchase-price adjustments.
- Future tax rates given the expiration of federal R&D credits, pending tax audits, and uncertain tax positions.