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. Impact of COVID-19 The COVID-19 pandemic and the resulting economic downturn are affecting business conditions in our industry. The duration, severity, and future impact of the pandemic, including as a result of more contagious variants of the virus that causes COVID-19, continue to be highly uncertain and could still result in significant disruptions to our business operations, as well as negative impacts to our financial condition. The semiconductor industry is experiencing various supply constraints due to the pandemic. While we are working with our global supply chain partners to mitigate this risk, the duration and extent of the supply chain disruptions remain uncertain.
RESULTS OF OPERATIONS
Fiscal Years EndedOctober 1, 2021 ,October 2, 2020 , andSeptember 27, 2019 . 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 endedOctober 2, 2020 , filed with theSEC onNovember 17, 2020 , as amended by Amendment No. 1 to such Annual Report on Form 10-K, filed with the SEC on January 29, 2021 (the "2020 10-K"), for Management's Discussions and Analysis of Financial Condition and Results of Operations for the fiscal year endedSeptember 27, 2019 . October 1, October 2, September 27, 2021 2020 2019 Net revenue 100.0 % 100.0 % 100.0 % Cost of goods sold 50.8 51.9 52.5 Gross profit 49.2 48.1 47.5 Operating expenses: Research and development 10.3 13.7 12.5 Selling, general, and administrative 6.3 6.9 5.9 Amortization of intangibles 0.7 0.4 0.7 Restructuring, impairment, and other charges 0.2 0.4 0.2 Total operating expenses 17.6 21.5 19.3 Operating income 31.6 26.6 28.2 Interest expense (0.3) - - Other income (expense), net - - 0.3 Income before income taxes 31.3 26.6 28.5 Provision for income taxes 2.0 2.3 3.2 Net income 29.3 % 24.3 % 25.3 % 29
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General
During the fiscal year endedOctober 1, 2021 , the following key factors contributed to our overall results of operations, financial position, and cash flows: •Net revenue increased 52.3% to$5,109.1 million , as compared to fiscal 2020. This increase in revenue was driven primarily by an increase in overall demand for wireless connectivity products coupled with the onset of technology upgrade cycles, including for 5G and Wi-Fi 6 solutions. Additionally, our average content per device for these next-generation solutions increased. •Our ending cash, cash equivalents, and marketable securities balance increased 4.8% to$1,027.2 million as ofOctober 1, 2021 , from$980.0 million as ofOctober 2, 2020 . The increase in cash, cash equivalents, and marketable securities during fiscal 2021 was primarily due to cash generated from operations of$1,772.0 million , the borrowing of$1,000.0 million in Term Loans,$500.0 million of Senior Notes due 2023 (the "2023 Notes"),$500.0 million of Senior Notes due 2026 (the "2026 Notes"), and$500.0 million of Senior Notes due 2031 (the "2031 Notes" and, together with the 2023 Notes and the 2026 Notes, the "Notes"), partially offset by payments for acquisitions of$2,751.0 million , capital expenditures of$637.8 million , dividend payments of$340.6 million , repayments of Term Loans of$250.0 million , and the repurchase of 1.4 million shares of common stock for$195.6 million . Net Revenue Fiscal Years Ended October 1, October 2, September 27, 2021 Change 2020 Change 2019 (dollars in millions) Net revenue$ 5,109.1 52.3%$ 3,355.7 (0.6)%$ 3,376.8 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 increase in net revenue in fiscal 2021, as compared to fiscal 2020, was driven by an increase in overall demand for wireless connectivity products coupled with the onset of technology upgrade cycles, including for 5G and Wi-Fi 6 solutions. Additionally, our average content per device for these next-generation solutions increased. For information regarding net revenue by geographic region and customer concentration, see Note 15 to Item 8 of this Annual Report on Form 10-K. Gross Profit Fiscal Years Ended October 1, October 2, September 27, 2021 Change 2020 Change 2019 (dollars in millions) Gross profit$ 2,512.4 55.8%$ 1,612.9 0.6%$ 1,603.8 % of net revenue 49.2 % 48.1 % 47.5 % 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. As part of our normal course of business, we intend to improve gross profit with efforts to increase unit volumes, 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 2021, as compared to fiscal 2020, was primarily the result of a favorable product mix and higher unit volumes with a gross profit impact of$950.2 million , partially offset by lower average selling prices and an increase in amortization of acquisition intangibles, including inventory step-up, as a result of the Acquisition completed during the period. Gross profit as a percentage of net revenue is estimated to decrease in fiscal 2022 due to amortization of intangibles acquired during fiscal 2021. 30 --------------------------------------------------------------------------------
Research and Development
Fiscal Years Ended
October 1, October 2, September 27,
2021 Change 2020 Change 2019
(dollars in millions)
Research and development $ 532.3 14.7% $ 464.1 9.4% $ 424.1
% of net revenue 10.4 % 13.8 % 12.6 %
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 2021, as compared to
fiscal 2020, was primarily related to headcount-related expenses, including
share-based compensation, as a result of our increased investment in developing
new technologies and products.
Selling, General, and Administrative
Fiscal Years Ended
October 1, October 2, September 27,
2021 Change 2020 Change 2019
(dollars in millions)
Selling, general, and administrative $ 322.5 39.4% $ 231.4 16.7% $ 198.3
% of net revenue 6.3 % 6.9 % 5.9 %
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 2021, as
compared to fiscal 2020, was primarily related to increases in costs associated
with the Acquisition completed during the period and increases in
headcount-related expenses, including share-based compensation.
Amortization of Intangibles
Fiscal Years Ended
October 1, October 2, September 27,
2021 Change 2020 Change 2019
(dollars in millions)
Amortization of intangibles $ 36.0 205.1% $ 11.8 (47.8)% $ 22.6
% of net revenue 0.7 % 0.4 % 0.7 %
The increase in amortization expense for fiscal 2021, as compared to fiscal
2020, was primarily due to additional intangible assets acquired during fiscal
2021. See Note 3 to Item 8 of this Annual Report on Form 10-K for a detailed
discussion of intangible assets acquired. Amortization expense is estimated to
increase in fiscal 2022 due to amortization of intangibles acquired during
fiscal 2021.
Restructuring, Impairment, and Other Charges
Fiscal Years Ended
October 1, October 2, September 27,
2021 Change 2020 Change 2019
(dollars in millions)
Restructuring, impairment, and other charges $ 8.9 (35.5)% $ 13.8 102.9% $ 6.8
% of net revenue 0.2 % 0.4 % 0.2 %
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Restructuring, impairment, and other charges incurred in fiscal 2021 were primarily related to an impairment on property, plant, and equipment.
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.
Interest Expense
Fiscal Years Ended
October 1, October 2, September 27,
2021 Change 2020 Change 2019
(dollars in millions)
Interest expense $ (13.4) 100.0% $ - -% $ -
% of net revenue (0.3) % - % - %
The increase in interest expense for fiscal 2021, as compared to fiscal 2020,
was due to the issuance of the Notes in May 2021 and the borrowing of the Term
Loans (as defined below) in July 2021 . Interest expense is estimated to increase
in fiscal 2022 as our average borrowings outstanding are expected to be higher
than in fiscal 2021.
Provision for Income Taxes
Fiscal Years Ended
October 1, October 2, September 27,
2021 Change 2020 Change 2019
(dollars in millions)
Provision for income taxes $ 100.4 30.6% $ 76.9 (28.4)% $ 107.4
% of net revenue 2.0 % 2.3 % 3.2 %
The annual effective tax rate for fiscal 2021 of 6.3% was less than the United
States federal statutory rate of 21.0% resulting primarily from foreign earnings
taxed at rates lower than the federal statutory rate, a benefit related to a
change in the reserve for uncertain tax positions, a benefit from
foreign-derived intangible income deduction ("FDII"), windfall tax deductions,
research and development credits, and foreign tax credits, partially offset by a
tax on global intangible low-taxed income ("GILTI").
The decrease in the effective tax rate for fiscal 2021, as compared to the 11.2% effective rate for fiscal 2020, was primarily due to benefits related to favorable changes in the reserves for uncertain tax positions.
During fiscal 2021, we concluded anIRS examination of our federal income tax returns for fiscal 2015 and 2016. With the conclusion of the audit, we decreased the reserve for uncertain tax positions, including interest and penalties, which resulted in the recognition of an income tax benefit of$34.8 million in fiscal 2021. In addition, the statute of limitations expired on the federal income tax return for fiscal 2017 and, as a result, we decreased the related reserve for uncertain tax positions of$25.5 million . The increase in income tax expense in fiscal 2021, as compared to fiscal 2020, was primarily due to increased income from operations, partially offset by a decrease in the reserve for uncertain tax positions.
See Note 9 to Item 8 of this Annual Report on Form 10-K for additional information regarding income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Set forth below is a summary of our cash flows for the periods indicated:
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Fiscal Years Ended
October 1, October 2, September 27,
(in millions) 2021 2020 2019
Cash and cash equivalents at beginning of period
$ 851.3 $ 733.3 Net cash provided by operating activities 1,772.0 1,204.5 1,367.4 Net cash used in investing activities (3,133.2) (581.4) (336.9)
Net cash provided by (used in) financing activities 1,677.4
(907.7) (912.5)
Cash and cash equivalents at end of period $ 882.9 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$567.5 million increase in cash provided by operating activities for fiscal 2021, as compared to fiscal 2020, was primarily related to a$683.5 million increase in net income, partially offset by$170.4 million of unfavorable changes in working capital, due primarily to an increase in accounts receivable which resulted from higher revenue during the period. Cash used in investing activities: Cash used in investing activities consists primarily of cash paid for acquisitions, capital expenditures, purchased intangibles, and marketable securities, offset by cash received related to the sale or maturity of marketable securities. The$2,551.8 million increase in cash used in investing activities for fiscal 2021, as compared to fiscal 2020, was primarily related to a$2,751.0 million increase in cash paid for acquisitions and a$248.4 million increase in cash used for capital expenditures, partially offset by$452.8 million cash provided by the net sales of marketable securities. Cash provided by financing activities: Cash provided by financing activities consists primarily of proceeds and payments related to our long-term borrowings and cash transactions related to equity. The$2,585.1 million increase in cash provided by financing activities for fiscal 2021, as compared to fiscal 2020, was primarily related to an increase of$2,488.1 million in long-term debt issued and a decrease of$451.9 million in stock repurchase activity, partially offset by repayments of Term Loans of$250.0 million , a decrease of$45.5 million in net proceeds from employee stock option exercises, an increase of$33.6 million in dividend payments, and an increase of$22.1 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$1,027.2 million as ofOctober 1, 2021 , representing an increase of$47.3 million fromOctober 2, 2020 . We have outstanding$500.0 million of Notes Due 2023,$500.0 million of Notes Due 2026, and$500.0 million of Notes Due 2031. We have a term credit agreement (the "Term Credit Agreement") providing for a$1.0 billion term loan facility (the "Term Loan Facility"). OnJuly 26, 2021 , the Company borrowed$1.0 billion in aggregate principal amount of term loans (the "Term Loans") under the Term Loan Facility to finance a portion of the purchase price for the Acquisition and to pay fees and expenses incurred in connection therewith. During fiscal 2021, the Company repaid$250.0 million of outstanding borrowings under the Term Loans. As ofOctober 1, 2021 , there were$750.0 million of borrowings outstanding under the Term Credit Agreement. We have a Revolving Credit Agreement (the "Revolving Credit Agreement") under which we may borrow up to$750.0 million for general corporate purposes and working capital needs of the Company and its subsidiaries. As ofOctober 1, 2021 , there were no borrowings outstanding under the revolving credit facility (the "Revolver"). The Revolving Credit Agreement expiresJuly 26, 2026 . For a description of contractual obligations, such as taxes, leases, and debt, see Note 9, Note 11, and Note 17 to Item 8 of this Annual Report on Form 10-K, respectively. 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, and funds from our Revolver, will be sufficient to fund our short-term and long-term liquidity requirements primarily arising from: 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. However, we cannot be certain that our cash on hand, cash generated from operations, and funds from our Revolver will be available in the future to fund all of our capital and operating requirements. In addition, any future strategic investments and significant acquisitions may require additional 33 --------------------------------------------------------------------------------
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, certificates of deposit, money market funds,
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 ("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. The SEC
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; business combinations, which impacts
the fair value of acquired assets and assumed liabilities; 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 the Financial
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, price adjustments, 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 are 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 in the 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.
Business Combinations. We allocate the fair value of the purchase consideration
of a business acquisition to the tangible assets, liabilities, and intangible
assets acquired, including IPR&D, based on their estimated fair values. The
excess of the fair value of purchase consideration over the fair values of these
identifiable assets and liabilities is recorded as goodwill. IPR&D is initially
capitalized at fair value as an intangible asset with an indefinite life and
assessed for impairment thereafter. When an IPR&D project is completed, the
IPR&D is reclassified as an amortizable purchased intangible asset and amortized
over the asset's estimated useful life. Our valuation of acquired assets and
assumed liabilities requires significant estimates, especially with respect to
intangible assets. The valuation of intangible assets, in particular, requires
that we use valuation techniques such as the income approach. The income
approach includes the use of a discounted cash flow model, which includes
discounted cash flow scenarios and requires the following significant estimates:
future expected revenue, expenses, capital expenditures and other costs, and
discount rates. We estimate the fair value based upon assumptions we believe to
be reasonable, but which are inherently uncertain and unpredictable and, as a
result, actual results may differ from estimates. For finite-lived intangible
assets valued during fiscal 2021, a hypothetical change of ten percent to our
valuation estimate would impact amortization of acquisition intangibles by
$106.0 million over a weighted-average amortization period of 4.4 years.
Estimates associated with
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--------------------------------------------------------------------------------the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
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