SKYWORKS SOLUTIONS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially and adversely from those referred to herein due to a number of factors, including, but not limited to, those described below and in Item 1A "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
OVERVIEW
We, together with our consolidated subsidiaries, are empowering the wireless networking revolution. Our highly innovative analog semiconductors are connecting people, places, and things spanning a number of new and previously unimagined applications within the aerospace, automotive, broadband, cellular infrastructure, connected home, entertainment and gaming, industrial, medical, military, smartphone, tablet, and wearable markets. Our key customers include Amazon, Apple, Arris, Bose, Cisco, DJI, Ericsson, Foxconn, Garmin, Gemalto (a Thales company), General Electric, Fibocom,Huawei , Itron, Lenovo, LG Electronics, Microsoft, Motorola, Netgear,Northrop Grumman , OPPO,Rockwell Collins , Samsung, Sierra Wireless, Sonos, Technicolor, VIVO, Xiaomi, and ZTE. Impact of COVID-19 The COVID-19 pandemic and the resulting economic downturn are affecting business conditions in our industry. Overall demand for our products has decreased as a result of the pandemic, which impacted our operating results for fiscal 2020. The duration, severity, and future impact of the pandemic continue to be highly uncertain and could still result in significant disruptions to our business operations, including our supply chain, as well as negative impacts to our financial condition. As a result of the temporary suspension of our operations inMexicali, Mexico , for approximately two weeks inApril 2020 , we incurred a$23.4 million production utilization charge, as described below. A renewed suspension of our operations inMexicali , or a continued reduction in our production capacity due to employee quarantines, employee absenteeism, and restrictions on certain of our employees' ability to work, would negatively impact our future operating results.
RESULTS OF OPERATIONS
Fiscal Years EndedOctober 2, 2020 ,September 27, 2019 , andSeptember 28, 2018 . The following table sets forth the results of our operations expressed as a percentage of net revenue. See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedSeptember 27, 2019 , filed with theSEC onNovember 14, 2019 , as amended by Amendment No. 1 to such Annual Report on Form 10-K, filed with theSEC onJanuary 27, 2020 (the "2019 10-K"), for Management's Discussions and Analysis of Financial Condition and Results of Operations for the fiscal year endedSeptember 28, 2018 . 28 --------------------------------------------------------------------------------
October 2, September 27, September 28,
2020 2019 2018
Net revenue 100.0 % 100.0 % 100.0 %
Cost of goods sold 51.9 52.5 49.6
Gross profit 48.1 47.5 50.4
Operating expenses:
Research and development 13.7 12.5 10.4
Selling, general, and administrative 6.9 5.9 5.4
Amortization of intangibles 0.4 0.7 0.5
Restructuring, impairment, and other charges 0.4 0.2 -
Total operating expenses 21.5 19.3 16.3
Operating income 26.6 28.2 34.1
Other income (expense), net - 0.3 0.3
Income before income taxes 26.6 28.5 34.4
Provision for income taxes 2.3 3.2 10.7
Net income 24.3 % 25.3 % 23.7 %
General
During the fiscal year ended October 2, 2020 , the following key factors
contributed to our overall results of operations, financial position, and cash
flows:
•Net revenue decreased 0.6% to $3,355.7 million , as compared to fiscal 2019.
This decrease in revenue was driven primarily by reduced demand resulting from
Huawei continuing to remain on the Entity List. Additionally, demand for our
products was negatively impacted by the ongoing COVID-19 pandemic. These
decreases in revenue were partially offset by an increase in demand for our new
5G solutions being deployed across a growing set of customers.
•Our ending cash, cash equivalents and marketable securities balance decreased
9.5% to $980.0 million in fiscal 2020 from $1,082.2 million in fiscal 2019. This
decrease in cash, cash equivalents and marketable securities during fiscal 2020,
was primarily the result of the repurchase of 6.3 million shares of common stock
for $647.5 million , capital expenditures of $389.4 million , and dividend
payments of $307.0 million , partially offset by cash generated from operations
of $1,204.5 million .
Net Revenue
Fiscal Years Ended
October 2, September 27, September 28,
2020 Change 2019 Change 2018
(dollars in millions)
Net revenue $ 3,355.7 (0.6)% $ 3,376.8 (12.7)% $ 3,868.0
We market and sell our products directly to OEMs 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 our fourth and first fiscal quarters
(which correspond to 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 and third fiscal quarters are
typically lower and in line with seasonal industry trends.
The decrease in net revenue in fiscal 2020, as compared to fiscal 2019, was
driven by reduced demand resulting from Huawei continuing to remain on the
Entity List as well as the ongoing COVID-19 pandemic, partially offset by an
increase in demand for our new 5G solutions being deployed across a growing set
of customers.
For information regarding net revenue by geographic region and customer
concentration, see Note 14 to Item 8 of this Annual Report on Form 10-K.
Gross Profit
29
--------------------------------------------------------------------------------
Fiscal Years Ended
October 2, September 27, September 28,
2020 Change 2019 Change 2018
(dollars in millions)
Gross profit $ 1,612.9 0.6% $ 1,603.8 (17.8)% $ 1,950.7
% of net revenue 48.1 % 47.5 % 50.4 %
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 over time. 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 increase in gross profit in fiscal 2020, as compared to fiscal 2019, was
primarily the result of a favorable product mix, partially offset by lower unit
volumes and lower average selling prices. In addition, there was a $23.4 million
production utilization charge in fiscal 2020, due to the temporary suspension of
our operations in Mexicali in the government's effort to contain the COVID-19
pandemic. This one-time charge was less than the $66.1 million inventory-related
one-time charge incurred in fiscal 2019, due to lower expected demand as a
result of Huawei being added to the Entity List. As a result of these impacts,
gross profit margin increased to 48.1% of net revenue for fiscal 2020, as
compared to 47.5% in fiscal 2019.
Research and Development
Fiscal Years Ended
October 2, September 27, September 28,
2020 Change 2019 Change 2018
(dollars in millions)
Research and development $ 464.1 9.4% $ 424.1 4.8% $ 404.5
% of net revenue 13.8 % 12.5 % 10.4 %
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 expense in fiscal 2020, as compared to
fiscal 2019, was primarily related to an increase in employee-related
share-based compensation expense due to higher performance achievement with
respect to performance stock awards.
Selling, General, and Administrative
Fiscal Years Ended
October 2, September 27, September 28,
2020 Change 2019 Change 2018
(dollars in millions)
Selling, general, and administrative $ 231.4 16.7% $ 198.3 (4.6)% $ 207.8
% of net revenue 6.9 % 5.9 % 5.4 %
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 in fiscal 2020, as
compared to fiscal 2019, was primarily related to increases in employee-related
share-based compensation expense due to higher performance achievement with
respect to performance stock awards.
Amortization of Intangibles
30
--------------------------------------------------------------------------------
Fiscal Years Ended
October 2, September 27, September 28,
2020 Change 2019 Change 2018
(dollars in millions)
Total amortization of intangibles,
including inventory step-up 46.0 (18.9)% 56.7 112.4% 26.7
% of net revenue 1.5 % 1.7 % 0.7 %
The decrease in total amortization expense for fiscal 2020, as compared to fiscal 2019, was primarily related to fully amortized intangible assets that were acquired in prior years.
Restructuring, Impairment, and Other Charges
Fiscal Years Ended
October 2, September 27, September 28,
2020 Change 2019 Change 2018
(dollars in millions)
Restructuring, impairment, and other charges $ 13.8 102.9% $ 6.8 750.0% $ 0.8
% of net revenue 0.4 % 0.2 % - %
Restructuring, impairment, and other charges incurred in fiscal 2020 were primarily related to the abandonment of a previously capitalized in-process research and development ("IPR&D") project.
Restructuring, impairment, and other charges incurred in fiscal 2019 were
primarily related to employee severance and other termination benefits as well
as charges on a leased facility resulting from restructuring plans initiated
during the period.
Provision for Income Taxes
Fiscal Years Ended
October 2, September 27, September 28,
2020 Change 2019 Change 2018
(dollars in millions)
Provision for income taxes $ 76.9 (28.4)% $ 107.4 (74.0)% $ 413.7
% of net revenue 2.3 % 3.2 % 10.7 %
The annual effective tax rate for fiscal 2020 of 8.6% was less than the United
States federal statutory rate of 21.0% primarily due to benefits of 9.7% related
to foreign earnings taxed at a rate less than the United States federal rate,
4.6% related to benefits from the foreign derived intangible income ("FDII")
deduction, 1.2% related to stock windfall deductions, and 2.6% related to the
recognition of federal research and development tax credits, partially offset by
increases in income tax rate expense impact of 4.0% related to global intangible
low-taxed income ("GILTI") expense, and 1.1% related to a change in our tax
reserves.
The decrease in the effective tax rate for fiscal 2020, as compared to the 11.2% effective rate for fiscal 2019, was primarily due to benefits related to favorable changes to GILTI and increased windfall tax deductions.
See Note 8 to Item 8 of this Annual Report on Form 10-K for additional information regarding income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal Years Ended
October 2, September 27, September 28,
(in millions) 2020 2019 2018
Cash and cash equivalents at beginning of period
$ 733.3 $ 1,616.8 Net cash provided by operating activities 1,204.5 1,367.4 1,260.6 Net cash used in investing activities (581.4) (336.9) (1,150.4) Net cash used in financing activities (907.7) (912.5) (993.7) Cash and cash equivalents at end of period$ 566.7 $ 851.3 $ 733.3 31
-------------------------------------------------------------------------------- Cash provided by operating activities: Cash provided by operating activities consists of net income for the period adjusted for certain non-cash items and changes in certain operating assets and liabilities. The$162.9 million decrease in cash provided by operating activities for fiscal 2020, as compared to fiscal 2019, was primarily related to unfavorable changes in working capital. Cash used in investing activities: Cash used in investing activities consists primarily of cash paid for acquisitions net of cash acquired, capital expenditures, purchased intangibles, and cash related to the sale or maturity of marketable securities. The$244.5 million increase in cash used in investing activities for fiscal 2020, as compared to fiscal 2019, was primarily related to a$269.3 million difference in the net purchase and sale of marketable securities, partially offset by a$9.0 million decrease in cash used for capital expenditures. Cash used in financing activities: Cash used in financing activities consists primarily of cash transactions related to equity. The$4.8 million decrease in cash used in financing activities for fiscal 2020, as compared to fiscal 2019, was primarily related to an increase of$35.0 million in net proceeds from employee stock option exercises and a decrease of$10.1 million in stock repurchase activity. These decreases in cash used in financing activities were partially offset by an increase of$33.1 million in dividend payments and an increase of$10.3 million related to the minimum statutory payroll tax withholdings upon vesting of employee performance and restricted stock awards.
Liquidity:
Cash, cash equivalents and marketable securities totaled$980.0 million as ofOctober 2, 2020 , representing a decrease of$102.3 million fromSeptember 27, 2019 . The decrease resulted from$647.5 million used to repurchase 6.3 million shares of stock,$389.4 million in capital expenditures, and$307.0 million in cash dividend payments, which was partially offset by$1,204.5 million in cash generated from operations during fiscal 2020. Based on our historical results of operations, we expect that our cash, cash equivalents and marketable securities on hand and the cash we expect to generate from operations will be sufficient to fund our research and development, capital expenditures, potential acquisitions, working capital, quarterly cash dividend payments (if such dividends are declared by the Board of Directors), outstanding commitments and other liquidity requirements associated with existing operations for at least the next 12 months. However, we cannot be certain that our cash on hand and cash generated from operations will be available in the future to fund all of our capital and operating requirements. In addition, any future strategic investments and acquisitions may require additional cash and capital resources. If we are unable to obtain sufficient cash or capital to meet our needs on a timely basis and on favorable terms, our business and operations could be materially and adversely affected.
Our invested cash balances primarily consist of highly liquid marketable
securities that are available to meet near-term cash requirements including:
term deposits, certificate of deposits, money market funds,
OFF-BALANCE SHEET ARRANGEMENTS
All significant contractual obligations are recorded on our consolidated balance sheet or fully disclosed in the notes to our consolidated financial statements. We have no material off-balance sheet arrangements as defined in SEC Regulation S-K Item 303(a)(4)(ii). CONTRACTUAL CASH FLOWS Set forth below is a summary of our contractual payment obligations related to our operating leases, other commitments, and long-term liabilities atOctober 2, 2020 (in millions): Payments Due By Period Less Than 1 Obligation Total Year 1-3 Years 3-5 Years Thereafter Other long-term liabilities (1)$ 310.1 $ 19.1 $ 38.2 $ 38.2 $ 214.6 Operating lease obligations 203.4 25.7 53.8 42.3 81.6 Other commitments (2) 11.5 8.0 3.5 - - Total$ 525.0 $ 52.8 $ 95.5 $ 80.5 $ 296.2 _________________________ 32
-------------------------------------------------------------------------------- (1)Other long-term liabilities primarily include our gross unrecognized tax benefits, repatriation tax payable, and executive deferred compensation. Gross unrecognized tax benefits and executive deferred compensation are both classified as beyond five years due to the uncertain nature of the liabilities. (2)Other commitments consist of contractual license and royalty payments and other purchase obligations.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments in applying our most critical accounting policies that can have a significant impact on the results we report in our financial statements. TheSEC has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and which require our most difficult, complex, or subjective judgments or estimates. Based on this definition, our most critical accounting policies include revenue recognition, which impacts the recording of net revenue; inventory valuation, which impacts the cost of goods sold and gross margin; assessment of goodwill and long-lived assets, which impacts the impairment of the respective assets; share-based compensation, which impacts cost of goods sold and operating expenses; loss contingencies, which impacts operating expenses; and income taxes, which impacts the income tax provision. These policies and significant judgments involved are discussed further below. We have other significant accounting policies that do not generally require subjective estimates or judgments or would not have a material impact on our results of operations. Our significant accounting policies are described in Note 2 to Item 8 of this Annual Report on Form 10-K. Revenue Recognition. We recognize revenue in accordance with theFinancial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") 606 Revenue from Contracts with Customers net of estimated reserves. Our revenue reserves contain uncertainties because they require management to make assumptions and to apply judgment to estimate the value of future credits to customers for product returns, price protection and stock rotation for products sold to certain electronic component distributors. We base these estimates on the expected value method considering all reasonably available information, including our historical experience and current expectations, and is reflected in the transaction price when sales are recorded. Inventory Valuation. We value our inventory at the lower of cost or net realizable value. Reserves for excess and obsolete inventory are established on a quarterly basis and are based on a detailed analysis of aged material, salability of our inventory, market conditions, and product life cycles. Once reserves are established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory. Our reserves contain uncertainties because the calculation requires management to make assumptions and to apply judgment regarding historical experience, market conditions and technological obsolescence. Changes in actual demand or market conditions could adversely impact our reserve calculations. Income Taxes. The application of tax laws and regulations to calculate our tax liabilities is subject to legal and factual interpretation, judgment, and uncertainty in a multitude of jurisdictions. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations, and court rulings. We recognize potential liabilities for anticipated tax audit issues inthe United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest will be due. We record an amount as an estimate of probable additional income tax liability at the largest amount that we feel is more likely than not, based upon the technical merits of the position, to be sustained upon audit by the relevant tax authority.
OTHER MATTERS
Inflation did not have a material impact on our results of operations during the
three-year period ended
© Edgar Online, source
