Skyworks Solutions, Inc. — Q2 FY2016 Form 10-Q
Business and period: Skyworks designs and sells analog semiconductors for wireless, consumer, automotive, industrial and other markets. The quarter ended April 1, 2016, and comprised 13 weeks; comparisons are with the 13 weeks ended April 3, 2015. Fiscal year 2016 ends September 30, 2016.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $775.1 million | $762.1 million | $1,701.9 million | $1,567.6 million |
| Gross margin | 50.4% | 46.2% | 50.7% | 46.3% |
| Operating income | $257.7 million | $219.9 million | $588.2 million | $466.7 million |
| Operating margin | 33.3% | 28.9% | 34.6% | 29.7% |
| Net income | $208.1 million | $166.5 million | $563.4 million | $361.7 million |
| Diluted EPS | $1.08 | $0.85 | $2.90 | $1.86 |
| Operating cash flow | Not separately reported | Not separately reported | $499.8 million | $538.2 million |
At April 1, cash and cash equivalents were $1,177.5 million, up from $1,043.6 million at October 2, 2015. Six-month capital expenditures were $116.9 million; cash dividends paid were $99.4 million, and $135.1 million was spent on the stock repurchase program. Total liabilities were $414.9 million; the balance sheet presents no interest-bearing debt. Current assets were $2,127.0 million and current liabilities $324.7 million.
Changes and notable items
- Revenue rose 1.7% for the quarter and 8.6% year to date. Management attributed growth to higher RF and analog content per device, smartphone replacement, emerging-market 3G/4G adoption, tablets and expansion into new markets; below-normal smartphone-model demand, lower seasonality and general market decline partly offset growth.
- Gross margin improved by 4.2 percentage points for the quarter and 4.4 points year to date. Higher unit volumes and lower per-unit material and manufacturing costs more than offset average selling-price erosion and product-mix effects. Management expects established-product average selling prices to decline 5%–10% annually.
- Year-to-date net income includes an $88.5 million PMC merger termination fee after PMC ended the proposed acquisition agreement. The six-month effective tax rate was 16.3%, including a $24.0 million benefit from reducing uncertain-tax-position reserves after the IRS concluded its FY2012–FY2013 audit, partly offset by $2.6 million in audit-related tax expense. FY2015 research credits of $10.2 million also reduced the period’s tax expense.
- Operating cash flow decreased $38.4 million year over year despite higher net income. Cash uses included a $110.5 million decrease in accounts payable and a $66.4 million inventory increase.
- Inventory increased to $333.7 million from $267.9 million, with finished goods rising to $112.5 million from $38.0 million. Management said inventory was built in anticipation of customer demand.
Outlook, liquidity and risks
Management expects cash on hand and operating cash generation to fund operations, R&D, capital expenditures, potential acquisitions, dividends and other requirements for at least the next 12 months, while cautioning that future funding availability is not assured. The filing gives no specific revenue or earnings guidance. Management cites typical consumer-electronics seasonality, with demand peaks in the second half of the calendar year. It reported no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Risks and contingencies include semiconductor price erosion, demand and product-mix variability, competition, and intellectual-property disputes that could result in adverse judgments or injunctive relief. The company recorded no legal-loss accrual, concluding losses were not probable, and said it did not believe pending matters were reasonably likely to cause a material loss. Of foreign-held cash, $405.8 million was considered indefinitely reinvested and could incur material tax effects if repatriated. The company also has a Panasonic joint-venture purchase obligation valued at $76.1 million, subject to foreign-exchange adjustments; related derivative fair-value changes had a de minimis earnings impact.
Shortly after quarter-end, management decided not to sell an asset group previously classified as held for sale; it was reclassified at April 1, with an immaterial impact on quarterly results. The board declared a $0.26-per-share dividend on April 28, payable June 2, 2016. The stock repurchase authorization had $264.9 million remaining at quarter-end.
Investor verification points
- Separate recurring operating performance from the $88.5 million merger fee and tax benefits when assessing six-month earnings and EPS.
- Review inventory growth and finished-goods buildup against subsequent sales, customer demand and any later inventory charges.
- Assess cash conversion, including the accounts-payable decline, capital spending and shareholder returns.
- Monitor the Panasonic purchase option, foreign-exchange exposure and the tax implications of foreign cash repatriation.
- Check subsequent filings for demand trends, price erosion, legal developments and any updated outlook; this filing provides no numerical revenue or EPS guidance.