Business context and reporting period
Skyworks Solutions, Inc. designs, develops, manufactures and markets analog semiconductor products used across wireless communications and other markets. This Form 10-Q covers fiscal Q2 and the six months ended March 29, 2019; comparisons are with the corresponding periods ended March 30, 2018. Amounts are in millions except per-share data.
Financial performance and position
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $810.4 | $913.4 | $1,782.4 | $1,965.3 |
| Gross profit / margin | $400.2 / 49.4% | $458.7 / 50.2% | $885.4 / 49.7% | $995.5 / 50.7% |
| Operating income | $237.6 | $289.4 | $558.5 | $672.9 |
| Net income | $214.0 | $276.0 | $498.8 | $346.4 |
| Diluted EPS | $1.23 | $1.50 | $2.83 | $1.87 |
- Q2 revenue declined 11.3% year over year; six-month revenue declined 9.3%. Q2 net income fell 22.5%, while six-month net income rose 44.0%.
- Six-month operating cash flow was $741.1, versus $795.0 a year earlier. Capital expenditures were $226.2; net cash used in investing was $96.6 and net cash used in financing was $561.5.
- Cash and cash equivalents were $816.3; marketable securities totaled $175.0. Combined cash, cash equivalents and marketable securities were $991.3 at March 29, 2019, down $58.9 from September 28, 2018. Current assets were $2,160.1 and current liabilities $338.3.
- Total liabilities were $684.6, including $315.7 of long-term tax liabilities. The balance sheet reports no borrowings or other conventional debt.
- Share repurchases were $425.5 for 5.7 million shares during the six months; dividends paid were $133.1. The company declared a subsequent $0.38-per-share dividend, payable June 11, 2019.
Material changes and management commentary
- Management attributed lower revenue primarily to weakness in smartphone demand. Growth in IoT applications, expansion into other verticals and increased RF and analog content per device partly offset the decline.
- Management attributed lower gross profit to lower average selling prices and unit volumes, partly offset by favorable product mix. Gross margin declined 0.8 percentage points in Q2 and 1.0 point for the six-month period.
- Six-month operating income fell 17.0%. R&D increased 5.9% to $216.7 as the company invested in product and technology development; SG&A declined 12.0% to $95.7, primarily due to lower share-based compensation. Intangible amortization increased, mainly from the Avnera acquisition.
- The six-month effective tax rate was 11.8%, versus 48.9% in the prior year. Prior-year results included one-time charges of $240.9 for the deemed repatriation tax and $18.5 for tax-reform-related deferred tax revaluation; this largely explains why year-to-date net income increased despite lower revenue and operating income.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management expected available cash, investments and operating cash generation to fund operations, R&D, capital spending, dividends and other requirements for at least the next 12 months, while cautioning that future funding needs and availability cannot be assured.
- The company cited seasonal demand patterns, smartphone weakness, semiconductor pricing erosion, and the possibility of adverse currency movements. It reported no material change to the risk factors in its 2018 Form 10-K.
- Management said no pending legal proceedings were reasonably expected to result in a material loss and believed pending litigation would not materially adversely affect the company. It noted that intellectual-property disputes could entail injunctive relief. No material off-balance-sheet arrangements were reported.
- A $2.0 billion share repurchase authorization was approved in January 2019 and replaced the prior program; $1.9 billion remained available at quarter-end. The timing and amount of future repurchases are at management’s discretion.
Important facts for investors to verify
- Whether smartphone demand and lower selling prices or unit volumes continue to pressure revenue and gross margin, and whether growth in other markets offsets that pressure.
- How much of the year-over-year increase in six-month net income reflects the prior-year tax charges rather than operating improvement.
- Whether elevated inventory ($555.0, up from $490.2 at fiscal year-end) converts into sales and cash without write-downs.
- Future capital spending, repurchases and dividends relative to operating cash generation and the $991.3 liquidity balance.
- Potential tax exposures, intellectual-property litigation developments and the company’s assessment of funding needs beyond the stated 12-month outlook.