Skyworks Solutions, Inc. — Q3 Fiscal 2010 Form 10-Q
Business and period: Skyworks designs, manufactures and markets analog and mixed-signal semiconductors for wireless, mobile internet, energy management and other markets. The third quarter was the 13 weeks ended July 2, 2010; comparisons are with the 13 weeks ended July 3, 2009. Fiscal year ends October 1, 2010.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $275.4 million | $191.2 million | $758.6 million | $574.4 million |
| Gross profit / margin | $118.3 million / 42.9% | $77.0 million / 40.2% | $320.7 million / 42.3% | $225.7 million / 39.3% |
| Operating income / margin | $53.5 million / 19.4% | $21.5 million / 11.2% | $134.3 million / 17.7% | $38.8 million / 6.7% |
| Net income / diluted EPS | $34.7 million / $0.19 | $18.7 million / $0.11 | $90.5 million / $0.50 | $36.6 million / $0.22 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $149.7 million | $143.3 million |
- Q3 revenue increased 44.0% year over year; nine-month revenue rose 32.1%. Management attributed growth principally to market-share gains and stronger demand for mobile internet, energy management and diversified analog applications.
- Gross margin improved 270 basis points in Q3 and 300 basis points year to date. Management cited factory productivity and process improvements, better product yields, lower material costs and higher revenue. Operating income rose 148.5% in Q3 and 246.6% year to date.
- Q3 operating expenses were $64.8 million, including a $1.0 million restructuring-related gain from equipment disposition. Nine-month 2009 results included $16.0 million of restructuring charges; 2010 did not.
- Q3 income tax provision was $17.9 million, compared with $0.8 million a year earlier; nine-month provision was $39.8 million versus $2.0 million. Effective tax rates were 34.0% and 30.6% for 2010 Q3 and nine months, respectively, compared with 3.8% and 5.2% in the prior-year periods.
Financial position, cash flow and debt
- At July 2, 2010, cash and cash equivalents were $383.8 million and restricted cash was $6.1 million. Current assets were $683.7 million and current liabilities were $191.1 million.
- Total debt was $74.4 million: $50.0 million drawn under a receivables-secured facility and $24.4 million carrying value of convertible notes. The company reported net cash of $315.5 million, calculated using cash, cash equivalents and restricted cash less debt.
- Nine-month operating cash flow was $149.7 million. Investing activities used $65.6 million, including $59.6 million in capital expenditures; financing activities used $64.5 million. Cash and cash equivalents increased $19.6 million from fiscal year-end.
- Receivables rose to $154.8 million from $115.0 million at October 2, 2009; inventory increased to $118.1 million from $86.1 million. Management said the increase in receivables and inventory partly offset operating cash generation.
Material changes, outlook and risks
- During the nine months, Skyworks repaid the remaining 1.25% convertible notes and retired $20.4 million principal of the 1.50% notes. Remaining principal on the convertible notes was $26.7 million; their carrying value was $24.4 million. The 1.50% notes mature in 2012 and may be put to the company upon a change in control.
- Management expected existing liquidity and cash generated from operations to fund research and development, capital expenditures, debt obligations, working capital and other needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Capital spending was directed largely toward expanding fabrication, assembly and test capacity. Management expected future capital expenditures to be funded by operating cash flow and said it may consider acquisitions.
- A manufacturing-services agreement requires approximately $13 million of minimum purchases from April through December 2010; management expected to meet the commitment. The fiscal 2009 restructuring reserve was $1.8 million, with substantial completion expected by fiscal year-end.
- The company held an illiquid auction-rate security with $3.2 million principal and $2.3 million carrying value. Failed auctions prevent current liquidity; management considered the impairment temporary, but a future other-than-temporary impairment could affect earnings.
- Tax-related uncertainties include $25.0 million of U.S. and $1.6 million of foreign deferred-tax valuation allowances, $15.1 million of unrecognized tax benefits, and a requirement to generate $180.2 million of future U.S. federal taxable income to use all U.S. deferred tax assets. Management warned that the effective tax rate may vary.
- Management cited economic and capital-market uncertainty affecting estimates, including valuations and impairment assessments. Intellectual-property disputes, foreign-exchange movements and the availability of capital for potential strategic investments are also noted risks. The filing reported no pending litigation expected to have a material adverse effect and no significant changes to the prior annual report’s risk factors.
Important facts for investors to verify
- Whether revenue growth and margin gains persisted after the July 2 quarter, and how much depended on market-share gains, demand and manufacturing improvements.
- Working-capital trends—particularly the increases in receivables and inventory—and their impact on subsequent operating cash flow.
- Debt repayment and refinancing terms, the October 12, 2010 extension date for the $50 million facility, and potential dilution or cash settlement related to the remaining convertible notes.
- Realizability of deferred tax assets, changes in tax valuation allowances or unrecognized tax benefits, and resulting effective tax-rate volatility.
- Status and valuation of the illiquid auction-rate security, the $13 million minimum-purchase commitment, and any change in legal or other contingencies.