SKYWORKS SOLUTIONS, INC. annual report, FY2015

Skyworks Solutions, Inc. — FY2015 Form 10-K

Reporting period: Fiscal year ended October 2, 2015 (52 weeks); fiscal 2014 had 53 weeks. The filing also reports fourth-quarter results. Skyworks designs and manufactures analog and RF semiconductor products for wireless, smartphone, automotive, industrial, medical, infrastructure and other markets.

Financial performance and liquidity

MetricFY2015FY2014
Revenue$3,258.4 million$2,291.5 million
Gross profit / margin$1,554.5 million / 47.7%$1,022.7 million / 44.6%
Operating income / margin$1,023.1 million / 31.4%$565.2 million / 24.7%
Net income$798.3 million$457.7 million
Diluted EPS$4.10$2.38
Cash from operations$992.8 million$772.4 million
Capital expenditures$430.1 million$208.6 million
Cash and cash equivalents, year-end$1,043.6 million$805.8 million
Working capital, year-end$1,450.8 million$1,131.6 million

Revenue grew 42.2%; net income rose approximately 74% and diluted EPS approximately 72%. Management attributed growth primarily to higher RF and analog content in increasingly complex smartphones, adoption of 3G/4G in emerging markets, tablets and wearables, and expansion into other verticals. Gross margin improvement reflected higher volume and lower unit costs, partly offset by average selling-price erosion, product mix and other costs. Operating expenses rose in dollars but declined as a share of revenue.

Fiscal 2015 free cash flow was approximately $562.7 million, calculated as operating cash flow less capital expenditures. Cash generation funded capacity investment, $237.3 million of share repurchases and $123.1 million of dividends. The balance sheet showed $560.2 million of total liabilities and $3,159.2 million of equity; the filing’s balance sheet does not list a separate debt balance. Of year-end cash, $386.4 million was held by foreign subsidiaries, including $340.8 million considered indefinitely reinvested.

Fourth quarter: Revenue was $880.8 million versus $718.2 million in Q4 FY2014; net income was $229.2 million versus $174.9 million. Gross profit was $436.2 million versus $324.0 million.

Material changes and significant developments

  • Revenue increased $966.9 million year over year; operating margin expanded 6.7 percentage points to 31.4%.
  • Capital expenditures more than doubled, principally for expansion in Mexico and Japan, including filter-production capacity.
  • Research and development spending increased to $303.2 million from $252.2 million; the company reported more than 2,200 worldwide patents.
  • Foxconn Technology Group and affiliates represented 44% of FY2015 revenue, compared with 34% in FY2014. The three largest receivable balances were 62% of gross accounts receivable at year-end.
  • Skyworks held a controlling 66% interest in FilterCo, its Panasonic filter joint venture, with an option to acquire the remaining 34% in August 2016. The company stated it planned to exercise the option.
  • After year-end, Skyworks’ proposed PMC-Sierra acquisition was terminated on November 23, 2015; PMC paid Skyworks an $88.5 million termination fee on November 24.

Outlook, risks and contingencies

No numerical revenue or earnings guidance is provided. Management expected cash on hand and operating cash generation to fund operations, R&D, capital spending, potential acquisitions and other needs for at least the next 12 months. The company continued to expect established-product average selling prices to decline 5%–10% annually, with cost reductions, volume and new products intended to offset pressure. A Singapore tax holiday was effective through September 2020, subject to conditions; it reduced FY2015 taxes by $26.6 million.

  • Key risks include semiconductor cyclicality, pricing and competitive pressure, product and technology transition execution, manufacturing yields and disruptions, and dependence on foundries, suppliers and limited-source components.
  • Customer concentration is material, and purchase orders may be canceled or deferred. Revenue by destination was heavily weighted to Asia-Pacific, particularly China; the filing cautions this does not necessarily represent end-market demand by region.
  • Intellectual-property disputes, product liability, international operations, foreign tax changes and the Singapore tax holiday are additional risks. The filing states that no legal-loss accrual was recorded because losses were not considered probable and no pending proceeding was believed reasonably likely to cause a material loss.
  • FY2015 included $3.4 million of restructuring charges. No goodwill impairment was identified. A Quantance acquisition included contingent consideration of up to $30 million tied to revenue goals.
  • The board authorized a new $400 million share-repurchase program in November 2015, replacing the prior program. Dividends remain subject to board declaration.

Most important facts for investors to verify

  • Whether customer concentration—particularly the 44% revenue share attributed to Foxconn and affiliates—remains elevated and how end-customer demand is trending.
  • Whether FY2015 growth, margin gains and cash generation persist after considering the 52-week versus 53-week fiscal-year comparison and seasonality.
  • Execution, utilization and returns from the major capacity investments in Mexico and Japan, and the cost and timing of the FilterCo purchase option.
  • Effects of expected selling-price declines, customer order variability, supply constraints and competition on gross margins and inventory.
  • Availability of foreign-held cash for domestic uses, tax exposures and the status of tax examinations and the Singapore tax holiday.
  • Use of the new repurchase authorization and sustainability of dividends alongside investment and acquisition needs.