Skyworks Solutions, Inc. — Q3 FY2013 Form 10-Q
Business context and reporting period. Skyworks designs and manufactures analog semiconductors for communications and other markets, including smartphones, tablets, automotive, industrial and medical applications. This filing covers the 13 weeks ended June 28, 2013, and the nine months ended that date; comparisons are with the corresponding 2012 periods.
Financial performance
| Metric | Three months ended June 28, 2013 | Year-over-year comparison | Nine months ended June 28, 2013 | Year-over-year comparison |
|---|---|---|---|---|
| Revenue | $436.1 million | +12.1% | $1,315.0 million | +14.6% |
| Gross profit / margin | $188.2 million / 43.2% | $165.3 million / 42.5% | $557.5 million / 42.4% | $489.4 million / 42.7% |
| Operating income / margin | $84.3 million / 19.4% | $62.0 million / 16.0% | $239.6 million / 18.2% | $180.8 million / 15.8% |
| Net income / diluted EPS | $65.7 million / $0.34 | $49.3 million / $0.26 | $193.9 million / $1.01 | $140.5 million / $0.74 |
| Cash from operations | Not stated for the quarter | Not stated | $342.2 million | $234.9 million |
- Cash flow and investment: Nine-month investing cash outflow was $84.6 million, including $85.4 million of capital expenditures, versus $272.1 million of investing outflow in 2012, when acquisitions accounted for substantial spending. Financing cash outflow was $164.4 million, principally reflecting $164.5 million of share repurchases.
- Liquidity and debt: Cash and cash equivalents were $400.3 million at June 28, 2013, up from $307.1 million at September 28, 2012. Current assets were $959.6 million and current liabilities $159.0 million; total liabilities were $217.8 million. The filing reports no interest expense for the 2013 periods and no debt balance on the balance sheet.
- Other balance-sheet items: Inventory was $232.3 million, goodwill $800.5 million, and net intangible assets $71.5 million. Property, plant and equipment, net, rose to $309.2 million from $279.4 million.
Changes and management commentary
- Revenue gains were driven primarily by higher demand for 3G, switching, wireless LAN and GPS products, partly offset by declining GSM/GPRS revenue as the 2G market contracted. Management cited smartphone replacement, tablet growth and expanding applications in adjacent markets as growth drivers.
- Quarterly gross margin improved year over year, supported by greater unit volumes and lower per-unit materials and manufacturing costs. For the nine-month period, gross margin edged down year over year as selling-price erosion and product mix partly offset volume and cost benefits. Management said established-product average selling prices typically decline 5%–10% annually.
- Operating expenses were $103.9 million for the quarter and $317.9 million for the nine months. Nine-month R&D increased 9.7% to $171.0 million, while SG&A declined 2.1% to $118.1 million. Restructuring charges were $6.4 million for the nine months; management expected no further material charges and expected related cash payments to be substantially completed in fiscal 2013.
- Cash from operations rose 46% year over year for the nine-month period. Capital spending increased to support production capacity in the United States and Mexico in anticipation of customer demand.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance is provided. Management noted typical seasonal demand peaks in the second half of the calendar year and expected cash on hand and operating cash generation to fund requirements for at least the next 12 months, while cautioning that future cash availability and acquisition or strategic investment needs could affect funding.
- Cash held by foreign subsidiaries totaled $214.2 million; approximately $146.7 million was considered indefinitely reinvested and could incur material tax effects if repatriated.
- The American Taxpayer Relief Act of 2012 reduced income tax expense by $6.1 million for the quarter and $15.1 million for the nine months. Effective tax rates were 22.3% and 18.8%, respectively, compared with 20.6% and 22.0% in the 2012 periods.
- A $2.3 million auction-rate security remained classified as a Level 3 asset; its par value was $3.2 million and it was scheduled to mature in 2017. The company identified no impairment indicators for goodwill or intangible assets during the period.
- A shareholder lawsuit relating to the AATI acquisition remained pending; defendants sought dismissal, with a hearing set for August 2, 2013. The company recorded no loss contingency, stating losses were remote and no legal matter was reasonably possible to result in a material loss. The filing also describes general intellectual-property litigation risks and customer indemnities.
- On July 16, 2013, after quarter-end, the board authorized a new stock repurchase program of up to $250 million through July 16, 2015, replacing the prior program.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Investor verification points
- Assess whether revenue momentum and customer demand continue, particularly in smartphones and the products management identified as growth drivers.
- Track gross-margin sensitivity to annual pricing erosion, product mix, manufacturing costs and the contribution from intellectual-property licensing or sales.
- Compare capital spending and production-capacity expansion with realized demand and operating cash generation.
- Monitor buybacks, share count, foreign-held cash and the potential tax cost of repatriation.
- Follow the AATI-related litigation and any developments in the auction-rate security’s valuation or liquidity.