Skyworks Solutions, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2016, each compared with the corresponding fiscal 2015 period. The 13-week quarter ended July 1, 2016. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Business context and financial results
Skyworks makes analog semiconductors for wireless and connected-device markets, including smartphones, automotive, broadband, industrial and medical applications.
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $751.7 | $810.0 | $2,453.6 | $2,377.6 |
| Gross profit / margin | $378.3 / 50.3% | $393.1 / 48.5% | $1,240.8 / 50.6% | $1,118.3 / 47.0% |
| Operating income / margin | $238.6 / 31.7% | $258.8 / 31.9% | $826.8 / 33.8% | $725.5 / 30.5% |
| Net income | $185.0 | $207.4 | $748.4 | $569.1 |
| Diluted EPS | $0.97 | $1.06 | $3.87 | $2.92 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $640.7 | $760.1 |
Q3 revenue fell 7.2%, mainly from lower demand at a key smartphone customer, partly reflecting that customer’s product cycle. Nine-month revenue rose 3.2%, supported by greater RF and analog content per device, emerging-market 3G/4G adoption, IoT applications and expansion into new markets. Nine-month operating margin improved about 320 basis points, with higher revenue and operating leverage partly offset by higher employee compensation.
Q3 gross margin increased year over year due to product mix and operational improvements, despite lower volumes and selling-price erosion. For the first nine months, higher volumes and lower unit manufacturing costs more than offset price erosion and mix effects. Management said established-product average selling prices typically decline 5%–10% annually and described efforts to offset that pressure through volume, cost reductions, manufacturing efficiency and new products.
Cash, liquidity and capital allocation
- Cash and cash equivalents were $973.7 at July 1, 2016, down $69.9 from $1,043.6 at October 2, 2015. Cash included $518.1 held domestically and $455.6 held by foreign subsidiaries; $417.6 of foreign cash was considered indefinitely reinvested and could incur material tax effects if repatriated.
- Nine-month investing cash outflow was $229.1, including $174.1 of capital expenditures and $55.0 paid for two acquisitions. Financing cash outflow was $481.5, including $327.0 of share repurchases and $148.8 of dividends.
- Inventory increased to $437.6 from $267.9; management attributed the increase to anticipated customer demand and backlog. Receivables were $570.0, versus $538.0.
- Total liabilities were $441.4, including $347.0 of current liabilities. The balance sheet presents no borrowing or debt balance; the filing text does not provide a separate debt metric.
- Management expected cash on hand and operating cash generation to cover operations, investment and other requirements for at least the next 12 months, while noting future acquisitions or strategic investments could require additional capital.
Material changes, unusual items and outlook
- Nine-month net income included an $88.5 PMC-Sierra merger termination fee, following PMC’s termination of the acquisition agreement. This one-time fee contributed to the increase in year-to-date EPS and cash generation.
- The nine-month effective tax rate was 17.7%, versus 21.8% a year earlier. The lower rate reflected, among other items, a $24.0 tax benefit from settling the IRS audit of fiscal 2012–2013 returns and research credits; the quarter’s rate was 21.7%.
- Skyworks acquired two businesses for $55.0 cash plus contingent consideration with an estimated fair value of $7.7. Their operating contribution was not significant in the period. Acquisition-related severance charges were part of $5.2 of nine-month restructuring and other charges.
- Skyworks exercised its option to acquire Panasonic’s remaining FilterCo interest on August 1, 2016, after quarter-end, paying $76.5 and becoming the sole owner. At July 1, the purchase obligation was recorded at $76.4.
- The board authorized a new $400.0 share repurchase program on July 19, 2016, replacing the prior program. The board also declared a $0.28 per-share dividend payable August 25, 2016. Dividends declared and paid during the first nine months were $0.78 per share.
- No specific revenue or earnings guidance was provided. Management cited normal second-half calendar-year seasonality in consumer electronics. It reported no material changes to previously disclosed risk factors.
Risks and contingencies
- Demand weakness at a key smartphone customer and product-cycle exposure affected quarterly revenue; smartphone end-market demand and product mix remain important sensitivities.
- Inventory rose substantially and contributed to operating cash use, as did lower accounts payable. Monitor inventory conversion and customer demand.
- Competition and continuing selling-price erosion may pressure margins. Foreign exchange movements could affect costs, and the company noted potential material tax effects if certain foreign cash is repatriated.
- The company disclosed ordinary-course legal matters, including intellectual-property disputes, but had recorded no loss contingency accrual and did not believe pending proceedings were reasonably likely to result in a material loss. It warned that adverse IP outcomes, including injunctive relief, could materially affect the business.
- No material off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of the year-to-date earnings and cash-flow improvement is attributable to the nonrecurring $88.5 PMC termination fee and tax benefits?
- Whether the key smartphone customer’s demand weakness persists, and how customer concentration and product cycles affect revenue.
- Whether the inventory build converts to shipments and cash, given the $160.7 inventory-related operating cash outflow.
- How FilterCo ownership and the two acquisitions affect future revenue, costs, contingent payments and capital requirements.
- Capital returns and liquidity after repurchases, dividends, capital spending and the $76.5 post-quarter FilterCo payment.