Skyworks Solutions, Inc. — Q2 FY2012 Form 10-Q
Business context and period. Skyworks designs analog and mixed-signal semiconductors for communications and other markets. The second quarter was the 13 weeks ended March 30, 2012; comparisons are with the 13 weeks ended April 1, 2011. Fiscal year-to-date figures cover six months. The company completed its acquisition of Advanced Analogic Technologies, Inc. (AATI) on January 9, 2012.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $364.7m | $325.4m | $758.4m | $660.5m |
| Gross profit / margin | $152.3m / 41.8% | $141.0m / 43.3% | $324.1m / 42.7% | $289.5m / 43.8% |
| Operating income / margin | $43.8m / 12.1% | $68.1m / 20.9% | $118.8m / 15.6% | $145.4m / 22.0% |
| Net income | $34.0m | $50.0m | $91.2m | $110.8m |
| Diluted EPS | $0.18 | $0.26 | $0.48 | $0.58 |
| Operating cash flow | Not separately stated for the quarter | $194.2m | $157.0m |
Margins and earnings. Revenue rose 12.1% for the quarter and 14.8% year to date, principally reflecting SiGe and AATI acquisition contributions. Gross margin declined 1.5 percentage points in the quarter and 1.1 points year to date. Management attributed gross-profit gains from volume and lower material/manufacturing costs to higher selling-price erosion, product mix, acquired-inventory fair-value step-up, and share-based compensation. Operating expenses increased substantially, including higher R&D, acquisition costs, acquired-intangible amortization, and restructuring charges; operating income and net income consequently fell year over year.
Cash, liquidity, and debt. Six-month operating cash flow was $194.2m. Investing used $240.9m, including $229.6m for AATI net of acquired cash and $32.2m of capital expenditures. Financing used $56.9m, including $48.1m to retire $26.7m principal of convertible notes and $12.4m of share repurchases. Cash and equivalents were $306.5m at March 30, down from $410.1m at September 30, 2011; current liabilities included no short-term debt, and total liabilities were $287.1m. Management said available liquidity and expected operating cash generation should fund requirements for at least 12 months. It expected to pay substantially all of the $59.4m acquisition-related contingent consideration in the quarter ending September 28, 2012.
Material changes, outlook, and risks
- AATI transaction: Preliminary purchase price was $277.3m, substantially cash; the purchase-price allocation remained subject to revision. Goodwill recognized was $138.8m. AATI’s post-acquisition operating contribution was described as insignificant for the reported periods.
- Costs and restructuring: Six-month acquisition-related expenses were $9.2m. Restructuring charges were $6.6m, including AATI and SiGe-related actions; the company expected approximately $6.3m of total costs for the AATI plan. Cash payments on restructuring plans were expected to finish in fiscal 2012.
- Pricing and demand: Management expected established-product average selling prices to decline at a normalized rate of 5%–10% annually, offset through volume, cost reductions, and new products. The filing provides no specific revenue or earnings guidance.
- Tax matters: The federal R&D tax credit had not been extended beyond December 31, 2011, and was excluded for credits earned thereafter. Unrecognized tax benefits totaled $48.0m; $34.2m would affect the effective tax rate if recognized. The company maintained a $44.8m deferred-tax valuation allowance.
- Contingencies: AATI-related shareholder litigation alleged fiduciary-duty and aiding-and-abetting claims. No loss accrual was recorded because management assessed liability as possible but not probable; the reasonably possible aggregate loss range was assessed as immaterial. Intellectual-property disputes generally could pose injunctive-relief risk.
- Other disclosures: Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material off-balance-sheet arrangements were reported. The company noted possible adverse tax effects from repatriating $74.7m held by foreign subsidiaries.
Important facts for investors to verify
- Final AATI purchase-price allocation, integration costs, and whether anticipated synergies materialize.
- Whether revenue growth can offset the reported gross- and operating-margin deterioration and ongoing selling-price declines.
- Timing and amount of the $59.4m contingent-consideration payment and resulting liquidity impact.
- Developments in AATI shareholder litigation and any changes to the company’s loss assessment.
- R&D tax-credit legislation, uncertain tax positions, and realization of deferred tax assets.