Skyworks Solutions, Inc. — Q3 FY2020 Form 10-Q
Business context and period: Skyworks supplies analog semiconductors for wireless and connected-device markets. The quarter comprised 13 weeks and ended June 26, 2020; year-to-date figures cover nine months. Fiscal 2020 is a 53-week year ending October 2, 2020.
Key financial results
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $736.8 million | $767.0 million | $2,398.9 million | $2,549.4 million |
| Gross profit / margin | $334.1 million / 45.3% | $312.5 million / 40.7% | $1,154.0 million / 48.1% | $1,197.8 million / 47.0% |
| Operating income | $147.5 million | $159.6 million | $624.2 million | $718.1 million |
| Net income | $129.7 million | $144.1 million | $567.9 million | $643.0 million |
| Diluted EPS | $0.77 | $0.83 | $3.33 | $3.67 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $937.5 million | $950.4 million |
Q3 revenue declined 3.9% year over year, while gross profit increased 6.9%; net income fell 10.0%. For the nine months, revenue decreased 5.9%, gross profit declined 3.7%, and net income decreased 11.7%. Q3 operating margin was 19.9% versus 20.8% a year earlier; year-to-date it was 26.0% versus 28.2%.
At June 26, 2020, cash and cash equivalents were $791.3 million and marketable securities totaled $371.1 million, together $1,162.4 million. Current assets were $2,337.4 million and current liabilities $401.1 million. Total liabilities were $890.0 million; the balance sheet does not list borrowings or a debt balance. Nine-month capital expenditures were $243.5 million. Cash and cash equivalents decreased $60.0 million from fiscal year-end, while cash, equivalents and securities combined increased $80.2 million.
Changes and drivers
- Management attributed lower revenue to continued Huawei restrictions under the U.S. Entity List and weaker demand associated with COVID-19; growth in new 5G solutions across more customers partly offset the declines.
- Q3 gross margin improved to 45.3%, mainly due to favorable product mix, despite lower volumes and selling prices. The prior-year quarter included a $66.6 million inventory-related charge; the current quarter included a $23.4 million production-utilization charge after Mexicali operations were suspended for about two weeks.
- Research and development and SG&A rose year over year, primarily due to higher employee-related share-based compensation. Nine-month share-based compensation expense was $111.6 million versus $58.6 million.
- Operating cash flow was $937.5 million, down from $950.4 million, which management primarily attributed to unfavorable working-capital changes. Inventory rose to $698.2 million from $609.7 million at fiscal year-end.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management said available cash, securities and expected operating cash flows should fund operations and liquidity needs for at least the next 12 months, while noting future funding needs and conditions remain uncertain.
- COVID-19 creates uncertain risks to demand, production, workforce availability, supply chains, transportation and customer payment. A renewed Mexicali shutdown or capacity constraints could further affect production and results. Management cautioned that lost sales may not be recovered in later periods.
- Customer and receivable concentration is significant: the three largest accounts represented 64% of gross receivables at quarter-end. The company also noted significant sales concentration among a limited number of customers.
- The company recorded a $9.8 million impairment after abandoning an in-process research and development project. Q3 restructuring, impairment and other charges were $11.8 million. These are separate from the $23.4 million production-utilization charge reported in cost of goods sold.
- The effective tax rate was 9.9% for Q3 and 9.2% for the nine-month period. The filing cites lower-taxed foreign earnings, FDII and tax credits among factors affecting the rate; Singapore’s tax holiday runs through September 30, 2030, subject to conditions.
- The board declared a $0.50-per-share dividend on July 23, 2020, payable September 1, 2020. The repurchase authorization had $1.2 billion remaining at June 26, 2020, and is scheduled to expire January 30, 2021.
- Management reported no pending legal proceedings it believes are reasonably likely to result in a material loss, and stated disclosure controls were effective. The filing identifies intellectual-property disputes and potential injunctive relief as risks.
Most important facts for investors to verify
- Whether COVID-19 disruption, customer demand and Huawei-related restrictions continue to affect revenue, production capacity and gross margin.
- Whether 5G demand offsets weakness elsewhere, and whether the improved Q3 gross margin is sustainable after one-time charges and product-mix effects.
- Inventory levels and working-capital conversion, given the year-end-to-quarter-end inventory increase and lower year-to-date operating cash flow.
- Exposure to major customers, including the 64% concentration among the top three receivable balances, and any changes in customer orders or payment risk.
- Cash deployment through repurchases, dividends and capital expenditure, together with the absence of a reported borrowing balance and the company’s stated 12-month liquidity expectation.