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SWKS > SEC Filings for SWKS > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for SKYWORKS SOLUTIONS, INC.

Form 10-Q for SKYWORKS SOLUTIONS, INC.


2-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This report and other documents we have filed with the 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 of 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 the 2013 10-K, 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 AND SIX MONTHS ENDED MARCH 28, 2014, AND MARCH 29, 2013

The following table sets forth the results of our operations expressed as a
percentage of our net revenue:
                                       Three Months Ended         Six Months Ended
                                    March 28,     March 29,    March 28,    March 29,
                                       2014          2013         2014         2013
Net revenue                           100.0 %       100.0  %     100.0 %      100.0  %
Cost of goods sold                     55.8          58.4         56.0         58.0
Gross profit                           44.2          41.6         44.0         42.0
Operating expenses:
Research and development               12.8          13.2         12.2         13.0
Selling, general and administrative     8.7           9.3          8.4          8.8
Amortization of intangibles             1.3           1.7          1.3          1.8
Restructuring and other charges           -           1.1            -          0.7
Total operating expenses               22.8          25.3         21.9         24.3
Operating income                       21.4          16.3         22.1         17.7
Other expense, net                        -          (0.3 )          -         (0.1 )
Income before income taxes             21.4          16.0         22.1         17.6
Provision for income taxes              5.3           1.3          4.8          3.0
Net income                             16.1 %        14.7  %      17.3 %       14.6  %

OVERVIEW

We, together with our consolidated subsidiaries, are an innovator of high performance analog semiconductors. Leveraging core technologies, we support automotive, broadband, energy management, GPS, industrial, medical, military, wireless infrastructure, wireless networking, smartphone and tablet applications. Our portfolio consists of amplifiers, attenuators, battery chargers, circulators, DC/DC converters, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, LED drivers, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches, technical ceramics, and voltage regulators.


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GENERAL

During the three and six months ended March 28, 2014, the following key factors contributed to our overall results of operations, financial position and cash flows:

Net revenue increased by 13% and 12% to $481 million and $986 million for the three and six months ended March 28, 2014, respectively, as compared to the corresponding periods in the prior fiscal year. This increase in revenue was primarily related to our continued growth as smartphones displace traditional cellular phones, tablet computing increases in popularity and our analog product portfolio expands to address additional content within the handset, tablet and adjacent vertical markets including medical, automotive, military and industrial.

Operating margin increased by approximately 510 and 440 basis points to over 21% and 22% for the three and six months ended March 28, 2014, respectively, as compared to the corresponding periods in the prior fiscal year. This increase in operating margin was primarily related to higher revenue and the leveraging impact on our gross margin and operating expenses partially offset by higher employee compensation expense.

As a result of the aforementioned factors, overall diluted earnings per share increased by 25% and 35% for the three and six months ended March 28, 2014, respectively, as compared to the corresponding periods in the prior fiscal year.

Our ending cash and cash equivalents balance increased approximately 56% to $798 million from $511 million as of September 27, 2013. This was the result of $373 million in cash from operations from the six months ended March 28, 2014, due to increased net income and improvements in working capital, partially offset by $79 million to repurchase 2.7 million shares of common stock and $58 million in capital expenditures.

On March 3, 2014, we announced the initiation of a quarterly cash dividend program. The first cash dividend of $0.11 per common share was declared on April 22, 2014, and is payable on May 22, 2014, to our stockholders of record as of the close of business on May 13, 2014.

NET REVENUE
                             Three Months Ended                  Six Months Ended
                       March 28,           March 29,      March 28,           March 29,
                          2014     Change     2013           2014     Change     2013
(dollars in millions)
Net revenue           $     481.0  13.1%  $     425.2    $     986.2  12.2%  $     878.9

We market and sell our products directly to original equipment manufacturers of communications and electronics products, third-party original design manufacturers and contract manufacturers, and indirectly through electronic components distributors. We generally experience seasonal peaks during the second half of the calendar year primarily as a result of increased worldwide production of consumer electronics in anticipation of increased holiday sales, whereas our second fiscal quarter is typically lower and in line with seasonal industry trends. In addition, 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 and we anticipate continuing this intellectual property strategy in future periods.

We generated net revenue of $481.0 million for the three months ended March 28, 2014, an increase of $55.8 million or 13.1%, as compared to $425.2 million for the corresponding period in fiscal year 2013. Net revenue increased by 12.2% or $107.3 million to $986.2 million for the six months ended March 28, 2014, as compared to $878.9 million for the corresponding period in fiscal year 2013. The increase in revenue was primarily driven by our ability to capture a higher share of the increasing RF and analog content per device as smartphones continue to displace traditional cellular phones, the increasing popularity in tablet computing, and our expanding analog product portfolio supporting new vertical markets including medical, automotive, military and industrial.


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GROSS PROFIT
                             Three Months Ended                  Six Months Ended
                       March 28,           March 29,      March 28,           March 29,
                          2014     Change     2013           2014     Change     2013
(dollars in millions)
Gross profit          $    212.4   20.2%  $    176.7     $    434.4   17.6%  $    369.3
% of net revenue            44.2 %              41.6 %         44.0 %              42.0 %

Gross profit represents net revenue less cost of goods sold. Our 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. 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 five to ten percent per year. As part of our normal course of business, we mitigate the gross margin impact of declining average selling prices with efforts to increase unit volumes, reduce material costs, improve manufacturing efficiencies, lower manufacturing costs of existing products and by introducing new and higher value-added products.

The $35.7 million increase in gross profit for the three months ended March 28, 2014, as compared to the corresponding period in fiscal year 2013, was primarily the result of higher unit volumes, a favorable mix of products sold and lower per unit materials and manufacturing costs, partially offset by the erosion of our average selling price. Gross profit margin increased from 41.6% for the three months ended March 29, 2013, to 44.2% for the three months ended March 28, 2014.

The $65.1 million increase in gross profit for the six months ended March 28, 2014, as compared to the corresponding period in fiscal year 2013, was primarily the result of higher unit volumes, lower per unit materials and manufacturing costs and a favorable mix of products sold which were partially offset by the erosion of our average selling price. As a result, gross profit margin increased from 42.0% for the six months ended March 29, 2013, to 44.0% for the six months ended March 28, 2014.

During the six months ended March 28, 2014, we continued to benefit from higher contribution margins associated with the licensing and/or sale of intellectual property.

RESEARCH AND DEVELOPMENT
                               Three Months Ended                 Six Months Ended
                          March 28,          March 29,     March 28,           March 29,
                            2014     Change    2013           2014     Change     2013
(dollars in millions)
Research and development $    61.6    9.4%  $    56.3     $    120.0    4.9%  $    114.4
% of net revenue              12.8 %             13.2 %         12.2 %              13.0 %

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 increase in research and development expenses for the three months ended March 28, 2014, as compared to the corresponding period in fiscal year 2013, was primarily related to increased compensation and product development expenses. Research and development expenses decreased as a percentage of net revenue due to the aforementioned increase in net revenue.

The increase in research and development expenses for the six months ended March 28, 2014, as compared to the corresponding period in fiscal year 2013, was primarily related to increased compensation and product development expenses. Research and development expenses decreased as a percentage of net revenue due to the aforementioned increase in net revenue.

SELLING, GENERAL AND ADMINISTRATIVE
                                          Three Months Ended                Six Months Ended
                                     March 28,          March 29,     March 28,          March 29,
                                       2014     Change    2013          2014     Change    2013
(dollars in millions)
Selling, general and administrative $    41.9    5.5%  $    39.7     $    83.0    6.7%  $    77.8
% of net revenue                          8.7 %              9.3 %         8.4 %              8.8 %


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Selling, general and administrative expenses include legal and related costs, 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.

The increase in selling, general and administrative expenses of 5.5% for the three months ended March 28, 2014, as compared to the corresponding period in fiscal year 2013, was primarily related to increased compensation expense. Selling, general and administrative expenses decreased as a percentage of net revenue due to the aforementioned increase in net revenue.

The increase in selling, general and administrative expenses of 6.7% for the six months ended March 28, 2014, as compared to the corresponding period in fiscal year 2013, was primarily related to increased compensation expense and legal costs incurred during the period. Selling, general and administrative expenses decreased as a percentage of net revenue due to the aforementioned increase in net revenue.

AMORTIZATION OF INTANGIBLES
                                  Three Months Ended                 Six Months Ended
                             March 28,           March 29,     March 28,           March 29,
                               2014     Change     2013          2014     Change     2013
(dollars in millions)
Amortization of intangibles $     6.3   (12.5)% $     7.2     $    12.8   (16.9)% $    15.4
% of net revenue                  1.3 %               1.7 %         1.3 %               1.8 %

The decrease in amortization expense for the three and six months ended March 28, 2014, was due to the end of the estimated useful lives of certain fully amortized intangible assets that were acquired in prior fiscal years.

RESTRUCTURING AND OTHER CHARGES
                                           Three Months Ended                     Six Months Ended
                                     March 28,              March 29,      March 28,              March 29,
                                       2014        Change     2013            2014       Change     2013
(dollars in millions)
Restructuring and other charges   $         -     (100.0)% $     4.8     $        -     (100.0)% $     6.4
% of net revenue                            - %                  1.1 %            - %                  0.7 %

We did not incur any restructuring or related charges during the three or six months ended March 28, 2014. The restructuring and other charges incurred in the three and six months ended March 29, 2013, related to organizational restructuring plans made during the prior fiscal year.

PROVISION FOR INCOME TAXES
                                 Three Months Ended                 Six Months Ended
                            March 28,           March 29,     March 28,          March 29,
                               2014     Change    2013          2014     Change    2013
(dollars in millions)
Provision for income taxes $     25.6   357.1% $     5.6     $    47.1   81.2%  $    26.0
% of net revenue                  5.3 %              1.3 %         4.8 %              3.0 %

We recorded a provision for income taxes of $25.6 million (which consisted of $24.1 million and $1.5 million related to United States and foreign income taxes, respectively) and $47.1 million (which consisted of $47.8 million and an offsetting benefit of $0.7 million for United States and foreign income taxes, respectively) for the three and six months ended March 28, 2014, respectively.

Our effective tax rate for the three and six months ended March 28, 2014, was 25.0% and 21.6%, respectively, as compared to 8.3% and 16.9% for the three and six months ended March 29, 2013, respectively. The difference between our year-to-date effective tax rate of 21.6% and the federal statutory rate of 35% was principally due to the recognition of foreign earnings taxed at rates lower than the federal statutory rate, the domestic production activities deduction, and a tax benefit related to an adjustment


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of our deferred taxes in Mexico as a result of a change in Mexican tax law, partially offset by an increase in our tax expense related to an increase in our reserve for uncertain tax positions.
The federal tax credit available under the Internal Revenue Code for research and development expenses expired on December 31, 2013. As of March 28, 2014, the United States Congress had not taken action to extend the Research and Experimentation Tax Credit. Accordingly, the income tax provision for the three and six months ended March 28, 2014, does not reflect the impact of any research and development tax credits that would have been earned after December 31, 2013, had the federal tax credit not expired.
In December 2013, Mexico enacted a comprehensive tax reform package, which became effective on January 1, 2014. As a result of this change, we adjusted our deferred taxes in that jurisdiction resulting in the recognition of a tax benefit that reduced our foreign income tax expense by $4.5 million for the six months ended March 28, 2014.
Our federal income tax return for fiscal year 2011 is currently under examination by the Internal Revenue Service. In addition, various state and international returns are under examinations by their respective taxing authorities. We do not expect the results of these audits to have a material impact on our financial position, results of operations or cash flows.

LIQUIDITY AND CAPITAL RESOURCES
                                                      Six Months Ended
                                                  March 28,     March 29,
(in millions)                                       2014           2013
Cash and cash equivalents at beginning of period $   511.1     $    307.1
Net cash provided by operating activities            373.0          277.9
Net cash used in investing activities                (58.2 )        (51.2 )
Net cash used in financing activities                (28.1 )        (75.0 )
Cash and cash equivalents at end of period       $   797.8     $    458.8

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 six months ended March 28, 2014, we generated $373.0 million of cash flow from operating activities, an increase of $95.1 million as compared to the $277.9 million generated during the six months ended March 29, 2013. The increase in cash flow from operating activities during the six months ended March 28, 2014, was related to higher net income combined with a net cash inflow from changes in operating assets and liabilities and to a lesser extent the increase in non-cash depreciation and share-based compensation. These increases were partially offset by a higher excess tax benefit associated with share-based compensation. Specifically, the changes in operating assets and liabilities that resulted in sources of cash were: $76.4 million due to the collection of outstanding accounts receivable during the period, $25.6 million in other current and long-term liabilities primarily related to accrued tax liabilities and to a lesser extent payroll accruals, $12.6 million related to changes in inventory and $8.5 million in other current and long-term assets.

Cash Flow from Investing Activities:
Our cash flow from investing activities typically 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 $58.2 million during the six months ended March 28, 2014, as compared to $51.2 million during the six months ended March 29, 2013. The increase in capital expenditures was due to the purchase of manufacturing equipment to support increased production in anticipation of accelerating demand from key customers at our wafer fabrication facilities in the United States and our assembly and test facility in Mexicali, Mexico.

Cash Flow from Financing Activities:
Our cash flow from financing activities consists primarily of cash transactions related to our equity and debt. During the six months ended March 28, 2014, we had net cash outflows from financing activities of $28.1 million, as compared to net cash outflows from financing activities of $75.0 million during the six months ended March 29, 2013. The decrease in cash used in financing activities was primarily related to the increase in option proceeds during the six months ended March 28, 2014. During the six months ended March 28, 2014, we had the following significant uses of cash in financing activities:

$78.6 million related to our repurchase of 2.7 million shares of our common stock pursuant to the share repurchase program approved by our Board of Directors on July 16, 2013; and

$18.6 million related to payroll tax withholdings on the vesting of employee performance and restricted stock awards.


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These uses of cash were offset by the net proceeds from cash payments from employee stock option exercises of $45.2 million and the excess tax benefit from stock option exercises of $23.9 million during the six months ended March 28, 2014.

Liquidity:
Cash and cash equivalent balances were $797.8 million at March 28, 2014, representing an increase of $286.7 million from September 27, 2013. The increase resulted from $373.0 million in cash generated from operations which was partially offset by $78.6 million used to repurchase 2.7 million shares of stock and $58.2 million in capital expenditures for increased production capacity during the six months ended March 28, 2014. On April 28, 2014, we announced that we had entered into a memorandum of understanding providing for the formation of a joint venture with Panasonic Corporation. We expect to pay approximately $148.5 million in cash to purchase a 66% interest in the joint venture entity. 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, pending acquisitions, working capital, quarterly cash dividend payments of $0.11 per share (if such dividends are declared by the Board of Directors), and other cash requirements for at least the next 12 months. However, we cannot be certain that our cash on hand and cash generated from operations will be available in the future to fund all of our capital and operating requirements. In addition, any future strategic investments and acquisitions may require additional cash and capital resources. If we are unable to obtain sufficient cash or capital to meet our 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 highly liquid term deposits with original maturities of 90 days or less and 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 cash and cash equivalent balance of $797.8 million at March 28, 2014, consisted of $431.5 million held domestically and $366.3 million held by foreign subsidiaries. Of the cash and cash equivalents held by our foreign subsidiaries at March 28, 2014, $305.9 million is considered by us to be indefinitely reinvested and would be subject to material tax effects if repatriated. The remaining $60.4 million of foreign cash and cash equivalents can be repatriated without any tax consequences.

CONTRACTUAL OBLIGATIONS

Our contractual obligations disclosure in the 2013 10-K has 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 July 2013, the Financial Accounting Standards Board issued an Accounting Statement Update on income taxes to improve the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is expected to reduce diversity in practice and better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exists. This guidance is not effective for us until fiscal year 2015. The adoption of this guidance is not expected to have a material impact to our financial position or results of operations.

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