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SKYWORKS SOLUTIONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) This report and other documents we have filed with the Securities and Exchange
Commission ("SEC") contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and are
subject to the "safe harbor" created by those sections. Words such as
"believes," "expects," "may," "will," "would," "should," "could," "seek,"
"intends," "plans," "potential," "continue," "estimates," "anticipates,"
"predicts," and similar expressions or variations or negatives of such words are
intended to identify forward-looking statements, but are not the exclusive means
of identifying forward-looking statements in this report. Additionally,
statements concerning future matters such as the development of new products,
enhancements or technologies, sales levels, expense levels and other statements
regarding matters that are not historical are forward-looking statements.
Although forward-looking statements in this report reflect the good faith
judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements involve
inherent risks and uncertainties and actual results and outcomes may differ
materially and adversely from the results and outcomes discussed in or
anticipated by the forward-looking statements. A number of important factors
could cause actual results to differ materially and adversely from those in the
forward-looking statements. We urge you to consider the risks and uncertainties
discussed in this Quarterly Report on Form 10-Q and our 2012 Annual Report on
Form 10-K for the fiscal year ended September 28, 2012, which was filed with the
SEC on November 21, 2012 (the "2012 10-K"), as amended by Amendment No. 1 to the
2012 10-K, filed with the SEC on January 28, 2013, under the heading "Risk
Factors" and in the other documents we have filed with the SEC in evaluating our
forward-looking statements. We have no plans, and undertake no obligation, to
revise or update our forward-looking statements to reflect any event or
circumstance that may arise after the date of this Quarterly Report on Form
10-Q. We caution readers not to place undue reliance upon any such
forward-looking statements, which speak only as of the date made.
In this document, the words "we," "our," "ours" and "us" refer only to Skyworks
Solutions, Inc. and its subsidiaries and not any other person or entity.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 28, 2012 AND DECEMBER 30, 2011.
The following table sets forth the results of our operations expressed as a
percentage of our net revenue for the three months ended December 28, 2012 and
December 30, 2011:
Three Months Ended
December 28, December 30,
2012 2011
Net revenue 100.0 % 100.0 %
Cost of goods sold 57.6 56.4
Gross profit 42.4 43.6
Operating expenses:
Research and development 12.8 11.9
Selling, general and administrative 8.4 10.9
Amortization of intangibles 1.8 1.6
Restructuring and other charges 0.4 0.2
Total operating expenses 23.4 24.6
Operating income 19.0 19.0
Interest expense - (0.1 )
Other income, net 0.1 -
Income before income taxes 19.1 18.9
Provision for income taxes 4.5 4.5
Net income 14.6 % 14.4 %
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OVERVIEW
We are an innovator of high performance analog semiconductors. Leveraging core
technologies, we support automotive, broadband, cellular infrastructure, energy
management, GPS, industrial, medical, military, wireless networking, smartphone
and tablet applications. Our portfolio includes amplifiers, attenuators,
circulators, demodulators, detectors, diodes, directional couplers, front-end
modules, hybrids, infrastructure RF subsystems, isolators, lighting and display
solutions, mixers, modulators, optocouplers, optoisolators, phase shifters,
PLLs/synthesizers/VCOs, power dividers/combiners, power management devices,
receivers, switches and technical ceramics.
NET REVENUE
Three Months Ended
December 28, December 30,
2012 Change 2011
(dollars in thousands)
Net revenue $ 453,723 15.2% $ 393,740
We market and sell our products directly to original equipment manufacturers of
communication electronic products, third-party original design manufacturers,
and contract manufacturers, and indirectly through electronic components
distributors. We periodically enter into revenue generating arrangements that
leverage our broad intellectual property portfolio by licensing or selling our
non-core patents or other intellectual property. We anticipate continuing this
intellectual property strategy in future periods.
We generated net revenue of $453.7 million for the three months ended
December 28, 2012, an increase of $60.0 million or 15.2% when compared to $393.7
million for the corresponding period in fiscal 2012. The increase in revenue was
primarily driven by our internal development of products and expanded product
portfolio supporting new vertical markets including medical, automotive,
military and industrial and to a lesser extent, the incremental revenue
associated with our acquisition of Advanced Analogic Technologies Inc ("AATI")
in fiscal 2012. In addition, we have continued to increase revenue as a result
of capturing a higher share of the increasing RF content per device as
smartphones continue to displace traditional cellular phones.
GROSS PROFIT
Three Months Ended
December 28, December 30,
2012 Change 2011
(dollars in thousands)
Gross profit $ 192,565 12.1% $ 171,850
% of net revenue 42.4 % 43.6 %
Gross profit represents net revenue less cost of goods sold. Cost of goods sold
consists primarily of purchased materials, labor and overhead (including
depreciation and share-based compensation expense) associated with product
manufacturing. Erosion of average selling prices of established products is
typical of the semiconductor industry due to constant product innovations.
Consistent with trends in the industry, we anticipate that average selling
prices for our established products will continue to decline at a normalized
rate of 5 to 10 percent per year. As part of our normal course of business, we
mitigate the gross profit margin impact of declining average selling prices with
efforts to increase unit volume, reduce materials costs and lower manufacturing
costs of existing products and by introducing new and/ or higher value-added
products.
Gross profit was $20.7 million greater for the three months ended December 28,
2012 than in the corresponding period in fiscal 2012. The increase in gross
profit was the result of higher unit volumes and lower per unit materials and
manufacturing costs with an aggregate gross profit benefit of approximately
$53.5 million. This benefit was offset by the erosion of our average selling
price and changes in product mix having a combined unfavorable impact on gross
profit of approximately $32.8 million. As a result, gross profit margin
decreased from 43.6% for the three months ended December 30, 2011 to 42.4% for
the three months ended December 28, 2012.
During the three months ended December 28, 2012, we continued to benefit from
higher contribution margins associated with the licensing and/or sale of
intellectual property.
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RESEARCH AND DEVELOPMENT
Three Months Ended
December 28, December 30,
2012 Change 2011
(dollars in thousands)
Research and development $ 58,054 23.7% $ 46,941
% of net revenue 12.8 % 11.9 %
Research and development expenses consist primarily of direct personnel costs
including share-based compensation expense, costs for pre-production evaluation
and testing of new devices, masks, engineering prototypes and design tool costs.
The 23.7% increase in research and development expenses for the three months
ended December 28, 2012, when compared to the corresponding period in fiscal
year 2012, is primarily related to higher head count and compensation expense
primarily from the acquisition of AATI, and to a lesser extent the increase is
attributable to increased internal product design and development activity for
our target markets.
SELLING, GENERAL AND ADMINISTRATIVE
Three Months Ended
December 28, December 30,
2012 Change 2011
(dollars in thousands)
Selling, general and administrative $ 38,128 (11.1)% $ 42,909
% of net revenue
8.4 % 10.9 %
Selling, general and administrative expenses include legal, accounting,
treasury, human resources, information systems, customer service, bad debt
expense, sales commissions, share-based compensation expense, advertising,
marketing, costs associated with business combinations completed or contemplated
during the period and other costs.
Selling, general and administrative expenses decreased by 11.1% for the three
months ended December 28, 2012, as compared to the corresponding period in
fiscal 2012. The decrease is primarily because of the reduction in overall legal
fees which were higher during the three months ended December 30, 2011 due to
the acquisition of AATI and was partially offset by increased head count and
related compensation expense during the three months ended December 28, 2012.
AMORTIZATION OF INTANGIBLES
Three Months Ended
December 28, December 30,
2012 Change 2011
(dollars in thousands)
Amortization of intangibles $ 8,156 29.2% $ 6,312
% of net revenue 1.8 % 1.6 %
The increase in amortization expense for the three months ended December 28,
2012 is primarily related to the intangible assets that were acquired and
recognized in connection with our acquisition of AATI during fiscal 2012.
RESTRUCTURING AND OTHER CHARGES
Three Months Ended
December 28, December 30,
2012 Change 2011
(dollars in thousands)
Restructuring and other charges $ 1,644 128.3% $ 720
% of net revenue 0.4 % 0.2 %
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The restructuring and other charges for the three months ended December 28, 2012
are severance costs primarily related to the front-end solutions restructuring
plan that was implemented during the period. In addition, we made cash payments
related to restructuring activities of approximately $1.1 million during the
three months ended December 28, 2012 and expect all cash payments to be
completed in fiscal 2013 in all material respects.
During the three months ended December 30, 2011, the Company recorded a $0.7
million restructuring charge related to a plan to reduce redundancies associated
with the acquisition of SiGe Semiconductor, Inc. during fiscal 2011.
PROVISION FOR INCOME TAXES
Three Months Ended
December 28, December 30,
2012 Change 2011
(dollars in thousands)
Provision for income taxes $ 20,349 16.0% $ 17,536
% of net revenue 4.5 % 4.5 %
We recorded a provision for income taxes of $20.3 million ($17.8 million and
$2.5 million for United States and foreign income taxes, respectively) and $17.5
million ($15.5 million and $2.0 million for United States and foreign income
taxes, respectively) for the three months ended December 28, 2012 and December
30, 2011, respectively.
The effective tax rate for the three months ended December 28, 2012 was 23.4% as
compared to 23.5% for the corresponding period in fiscal 2012. The difference
between our year to date effective tax rate of 23.4% and the federal statutory
rate of 35% is principally due to the recognition of foreign earnings in lower
tax jurisdictions and the domestic production activities deduction, partially
offset by an increase in our tax expense related to a change in our reserve for
uncertain tax positions.
In January 2013, the United States Congress enacted legislation to retroactively
extend the federal research and development tax credit and other tax provisions
which had previously expired. The effect of this legislation will be included in
the Company's effective tax rate in the second quarter of fiscal year 2013. If
this legislation had been enacted in the quarter ended December 28, 2012, the
effect would have been to reduce the Company's income tax expense by
approximately $7.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended
December 28, December 30,
(dollars in thousands) 2012 2011
Cash and cash equivalents at beginning of period (1) $ 306,293 $ 410,087
Net cash provided by operating activities
147,680 77,232
Net cash used in investing activities (25,616 ) (6,424 )
Net cash used in financing activities (50,819 ) (35,259 )
Cash and cash equivalents at end of period (1) $ 377,538 $ 445,636
_________________________
(1)Excludes restricted cash balances
Cash Flow from Operating Activities:
Our cash flow from operating activities consists of net income for the period
adjusted for certain non-cash items and changes in certain operating assets and
liabilities. During the three months ended December 28, 2012, we generated
$147.7 million of cash flow from operating activities, an increase of $70.4
million when compared to $77.2 million generated during the three months ended
December 30, 2011. The increase in cash flow from operating activities during
the three months ended December 28, 2012 was related to higher net income
combined with a net cash inflow from changes in operating assets and liabilities
in addition to increases in non-cash amortization of intangibles, depreciation
and share-based compensation expense. Specifically, the changes in operating
assets and liabilities that resulted in sources of cash were: $45.4 million due
to the collections of outstanding accounts receivable during the period related
prior quarter customer shipments, $17.3 in other current and long-term
liabilities primarily related to the timing of tax payments and $3.5 million
related to inventory. The offsetting change in operating liabilities was a use
of cash of $29.2 million resulting in a decrease to accounts payable due to the
timing of vendor payments during the period.
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Cash Flow from Investing Activities:
Our cash flow from investing activities consists of cash paid for acquisitions,
net of cash acquired, capital expenditures, cash received from the sale of
capital assets and the sale and maturity of investments. Cash flow used in
investing activities was $25.6 million during the three months ended
December 28, 2012, compared to $6.4 million during the three months ended
December 30, 2011. Cash used in investing activities increased due to the
strategic investment of $26.4 million in capital expenditures, primarily related
to the purchase of manufacturing equipment to support increased production in
anticipation of accelerating demand from key customers at our wafer fabrication
facility located in Massachusetts and our assembly and test facility in
Mexicali, Mexico. During the three months ended December 30, 2011, we invested
$6.4 million in capital expenditures. Our uses of cash during the three months
ended December 28, 2012 were partially offset by $0.8 million in proceeds
received upon the sale of investments.
Cash Flow from Financing Activities:
Our cash flows from financing activities consist primarily of cash transactions
related to our equity and debt. During the three months ended December 28, 2012,
we had net cash outflows from financing activities of $50.8 million, compared to
net cash outflows from financing activities of $35.3 million during the three
months ended December 30, 2011. During the three months ended December 28, 2012,
we had the following significant uses of cash:
• $41.7 million related to our repurchase of approximately 1.9 million shares
of our common stock pursuant to the share repurchase program approved by our
Board of Directors on November 8, 2012, and
• $15.2 million related to payroll tax withholdings on the vesting of employee
performance and restricted stock awards.
These uses of cash were partially offset by the net proceeds from an excess tax
benefit from stock option exercises of $3.1 million and cash payments from
employee stock option exercises of $3.0 million during the three months ended
December 28, 2012.
Liquidity:
Cash and cash equivalent balances (excluding restricted cash which is used to
collateralize outstanding letters of credit for insurance and lease obligations)
increased by $71.2 million to $377.5 million at December 28, 2012 and was
primarily related to the increase in cash from operations. During the three
months ended December 28, 2012, we used $41.7 million in cash to repurchase
approximately 1.9 million shares of stock and invested $26.4 million in cash in
capital expenditures. Based on our historical results of operations, we expect
that our cash and cash equivalents on hand and the cash we expect to generate
from operations will be sufficient to fund our research and development, capital
expenditures, working capital and other cash requirements for at least the next
12 months. However, we cannot be certain that our cash from operations will be
available in the future to fund all of our capital and operating requirements.
In addition, any strategic investments and acquisitions that we may make may
require additional capital resources. If we are unable to obtain sufficient cash
or capital to meet our capital needs on a timely basis and on favorable terms,
our business and operations could be materially and adversely affected.
Our invested cash balances primarily consist of money market funds where the
underlying securities primarily consist of United States treasury obligations,
United States agency obligations and repurchase agreements collateralized by
United States Government and agency obligations. Our invested cash balances also
include time deposits and certificates of deposit.
Our cash, cash equivalents and restricted cash balance of $378.4 million at
December 28, 2012 consisted of $216.2 million held domestically and $162.2
million held by foreign subsidiaries. Of the amount of cash, cash equivalents
and restricted cash held by our foreign subsidiaries at December 28, 2012,
approximately $96.2 million is considered by us to be indefinitely reinvested
and would be subject to material tax effects if repatriated.
CONTRACTUAL OBLIGATIONS
Our contractual obligations disclosure in our 2012 10-K, as amended by Amendment
No. 1 to the 2012 10-K, filed with the SEC on January 28, 2013, have not
materially changed since we filed that report.
OFF-BALANCE SHEET ARRANGEMENTS
We have no material off-balance sheet arrangements as defined in SEC Regulation
S-K- 303(a)(4)(ii).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2011, the Financial Accounting Standards Board issued technical
corrections and improvements to the Accounting Standards Codifications. The
guidance will not be effective for us until fiscal 2014. The adoption of the
guidance will not have a significant impact or financial position, results of
operations or cash flows.
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