☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 2022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission file number 001-05560
Skyworks Solutions, Inc.
(Exact name of registrant as specified in its charter)
Delaware
04-2302115
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
5260 California Avenue
Irvine
California
92617
(Address of principal executive offices)
(Zip Code)
(949)
231-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.25 per share
SWKS
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þYes¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þYes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes þ No
As of January 30, 2023, the registrant had 158,974,172 shares of common stock, par value $0.25 per share, outstanding.
Receivables, net of allowances of $0.8 and $0.8, respectively
764.1
1,094.0
Inventory
1,273.3
1,212.1
Other current assets
384.3
337.5
Total current assets
3,414.3
3,229.9
Property, plant, and equipment, net
1,562.7
1,604.8
Operating lease right-of-use assets
214.8
223.0
Goodwill
2,176.7
2,176.7
Intangible assets, net
1,373.0
1,444.7
Deferred tax assets, net
83.3
52.7
Marketable securities
—
0.5
Other long-term assets
122.6
141.5
Total assets
$
8,947.4
$
8,873.8
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
180.3
$
274.2
Accrued compensation and benefits
91.5
114.3
Current portion of long-term debt
499.5
499.2
Other current liabilities
454.2
339.2
Total current liabilities
1,225.5
1,226.9
Long-term debt
1,690.3
1,689.9
Long-term tax liabilities
216.1
213.5
Long-term operating lease liabilities
202.5
206.9
Other long-term liabilities
63.1
67.6
Total liabilities
3,397.5
3,404.8
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, no par value: 25.0 shares authorized, no shares issued
—
—
Common stock, $0.25 par value: 525.0 shares authorized; 159.1 shares issued and outstanding at December 30, 2022, and 160.2 shares issued and outstanding at September 30, 2022
39.7
40.0
Additional paid-in capital
3.9
11.9
Retained earnings
5,511.9
5,421.9
Accumulated other comprehensive loss
(5.6)
(4.8)
Total stockholders’ equity
5,549.9
5,469.0
Total liabilities and stockholders’ equity
$
8,947.4
$
8,873.8
See accompanying Notes to Consolidated Financial Statements.
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Skyworks Solutions, Inc., together with its consolidated subsidiaries (“Skyworks” or the “Company”), is empowering the wireless networking revolution. The Company’s analog and mixed-signal semiconductors are connecting people, places, and things, spanning a number of new applications within the aerospace, automotive, broadband, cellular infrastructure, connected home, defense, entertainment and gaming, industrial, medical, smartphone, tablet, and wearable markets.
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures, normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), have been condensed or omitted pursuant to those rules and regulations. However, in management’s opinion, the financial information reflects all adjustments, including those of a normal recurring nature, necessary to present fairly the results of operations, financial position, and cash flows of the Company for the periods presented. The results of operations, financial position, and cash flows for the Company during the interim periods are not necessarily indicative of those expected for the full year. This information should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022, filed with the SEC on November 23, 2022, as amended by Amendment No. 1 to such Annual Report on Form 10-K, filed with the SEC on January 27, 2023 (“2022 10-K”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, expenses, comprehensive income, and accumulated other comprehensive loss that are reported during the reporting period. The Company evaluates its estimates on an ongoing basis using historical experience and other factors, including the current economic environment. Judgment is required in determining the reserves for, and fair value of, items such as overall fair value assessments of assets and liabilities, particularly those classified as Level 2 or Level 3 in the fair value hierarchy, marketable securities, inventory, intangible assets associated with business combinations, share-based compensation, revenue reserves, loss contingencies, and income taxes. In addition, judgment is required in determining whether a potential indicator of impairment of long-lived assets exists and in estimating future cash flows for any necessary impairment testing. Actual results could differ significantly from these estimates.
The Company’s fiscal year ends on the Friday closest to September 30. Fiscal 2023 consists of 52 weeks and ends on September 29, 2023. Fiscal 2022 consisted of 52 weeks and ended on September 30, 2022. The three months ended December 30, 2022, and December 31, 2021, each consisted of 13 weeks, respectively.
2. REVENUE RECOGNITION
The Company presents net revenue by geographic area, based upon the location of the original equipment manufacturers’ (“OEMs”) headquarters, and by sales channel, as it believes that doing so best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Individually insignificant OEMs are presented based upon the location of the Company’s direct customer, which is typically a distributor. Net revenue by geographic area is as follows (in millions):
Net revenue by sales channel is as follows (in millions):
Three Months Ended
December 30, 2022
December 31, 2021
Distributors
$
1,179.1
$
1,290.5
Direct customers
150.2
219.9
Total net revenue
$
1,329.3
$
1,510.4
The Company’s revenue from external customers is generated principally from the sale of semiconductor products that facilitate various wireless communication applications. Accordingly, the Company considers its product offerings to be similar in nature and therefore not segregated for reporting purposes.
3. MARKETABLE SECURITIES
The Company’s portfolio of available-for-sale marketable securities consists of the following (in millions):
Current
Noncurrent
December 30, 2022
September 30, 2022
December 30, 2022
September 30, 2022
U.S. Treasury and government securities
$
88.3
$
13.1
$
—
$
0.5
Corporate bonds and notes
83.7
0.2
—
—
Municipal bonds
0.7
7.0
—
—
Total marketable securities
$
172.7
$
20.3
$
—
$
0.5
Neither gross unrealized gains and losses nor realized gains and losses were material as of December 30, 2022, or September 30, 2022.
4. FAIR VALUE
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company groups its financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less-active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data.
•Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by the Company.
Assets and liabilities recorded at fair value on a recurring basis consisted of the following (in millions):
As of
December 30, 2022
September 30, 2022
Fair Value Measurements
Fair Value Measurements
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Assets
Cash and cash equivalents (1)
$
819.9
$
773.0
$
46.9
$
—
$
566.0
$
565.7
$
0.3
$
—
U.S. Treasury and government securities
88.3
7.8
80.5
—
13.6
3.6
10.0
—
Corporate bonds and notes
83.7
—
83.7
—
0.2
—
0.2
—
Municipal bonds
0.7
—
0.7
—
7.0
—
7.0
—
Total assets at fair value
$
992.6
$
780.8
$
211.8
$
—
$
586.8
$
569.3
$
17.5
$
—
(1) Cash equivalents included in Levels 1 and 2 consist of money market funds and corporate bonds and notes, commercial paper, and agency securities purchased with less than ninety days until maturity.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets and liabilities, such as goodwill, intangible assets, and other long-lived assets resulting from business combinations, are measured at fair value using income approach valuation methodologies at the date of acquisition and are subsequently re-measured if there are indicators of impairment. There were no indicators of impairment identified during the three months ended December 30, 2022.
Fair Value of Debt
The Company’s debt is carried at amortized cost and is measured at fair value quarterly for disclosure purposes. The estimated fair values are based on Level 2 inputs as the fair value is based on quoted prices for the Company’s debt and comparable instruments in inactive markets. The carrying value of the Term Loan approximates its fair value as the Term Loan is carried at a market observable interest rate that resets periodically.
The carrying amount and estimated fair value of debt consists of the following (in millions):
As of
December 30, 2022
September 30, 2022
Carrying Amount
Estimated Fair Value
Carrying Amount
Estimated Fair Value
0.90% Senior Notes due 2023
$
499.5
$
490.2
$
499.2
$
488.5
1.80% Senior Notes due 2026
497.1
442.7
496.8
431.2
3.00% Senior Notes due 2031
494.7
393.5
494.5
377.6
Total debt
$
1,491.3
$
1,326.4
$
1,490.5
$
1,297.3
5. INVENTORY
Inventory consists of the following (in millions):
Property, plant, and equipment, net consists of the following (in millions):
As of
December 30, 2022
September 30, 2022
Land and improvements
$
12.0
$
11.9
Buildings and improvements
562.0
555.6
Furniture and fixtures
71.6
70.1
Machinery and equipment
3,360.6
3,316.3
Construction in progress
144.7
157.2
Total property, plant, and equipment, gross
4,150.9
4,111.1
Accumulated depreciation
(2,588.2)
(2,506.3)
Total property, plant, and equipment, net
$
1,562.7
$
1,604.8
7. GOODWILL AND INTANGIBLE ASSETS
There were no changes to the carrying amount of goodwill during the three months ended December 30, 2022.
The Company tests its goodwill for impairment annually as of the first day of its fourth fiscal quarter and in interim periods if certain events occur indicating the carrying value of goodwill may be impaired. There were no indicators of impairment noted during the three months ended December 30, 2022.
Intangible assets consist of the following (in millions):
As of
As of
Weighted Average Amortization Period (Years)
December 30, 2022
September 30, 2022
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying Amount
Accumulated
Amortization
Net
Carrying
Amount
Customer relationships and backlog
2.3
$
154.6
$
(143.9)
$
10.7
$
154.6
$
(122.3)
$
32.3
Developed technology and other
6.0
1,288.6
(253.6)
1,035.0
1,280.9
(209.2)
1,071.7
Technology licenses
2.7
74.3
(20.1)
54.2
105.1
(45.2)
59.9
In-process research and development
273.1
—
273.1
280.8
—
280.8
Total intangible assets
$
1,790.6
$
(417.6)
$
1,373.0
$
1,821.4
$
(376.7)
$
1,444.7
Fully amortized intangible assets are eliminated from both the gross and accumulated amortization amounts in the first quarter of each fiscal year. During the three months ended December 30, 2022, $7.7 million of in-process research and development (“IPR&D”) assets were transferred to definite-lived intangible assets, and are being amortized over their useful lives of 12.0 years. Amortization expense related to definite-lived intangible assets was $72.0 million and $80.0 million for the three months ended December 30, 2022 and December 31, 2021, respectively.
Annual amortization expense for the next five fiscal years related to definite-lived intangible assets, excluding IPR&D, is expected to be as follows (in millions):
The provision for income taxes consists of the following components (in millions):
Three Months Ended
December 30, 2022
December 31, 2021
United States income taxes
$
26.4
$
18.4
Foreign income taxes
14.9
17.8
Provision for income taxes
$
41.3
$
36.2
Effective tax rate
11.8
%
8.3
%
The difference between the Company’s effective tax rate and the 21.0% United States federal statutory rate for the three months ended December 30, 2022 resulted primarily from foreign earnings taxed at rates lower than the federal statutory rate, a benefit from foreign-derived intangible income deduction (“FDII”), and research and experimentation and foreign tax credits earned, partially offset by a tax on global intangible low-taxed income (“GILTI”), and tax expense related to a change in the reserve for uncertain tax positions.
The difference between the Company’s effective tax rate and the 21.0% United States federal statutory rate during the three months ended December 31, 2021 resulted primarily from foreign earnings taxed at rates lower than the federal statutory rate, a benefit from foreign-derived intangible income deduction (“FDII”), windfall tax deductions, and research and experimentation and foreign tax credits earned, partially offset by a tax on global intangible low-taxed income (“GILTI”), and tax expense related to a change in the reserve for uncertain tax positions.
9. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, various lawsuits, claims, and proceedings have been, and may in the future be, instituted or asserted against the Company, including those pertaining to patent infringement, intellectual property, environmental hazards, product liability and warranty, safety and health, employment, and contractual matters.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted and may in the future assert patent, copyright, trademark, and other intellectual property rights to technologies that are important to the Company’s business and have demanded and may in the future demand that the Company license their technology. The outcome of any such litigation cannot be predicted with certainty and some such lawsuits, claims, or proceedings may be disposed of unfavorably to the Company. Generally speaking, intellectual property disputes often have a risk of injunctive relief, which, if imposed against the Company, could materially and adversely affect the Company’s financial condition or results of operations. From time to time the Company may also be involved in legal proceedings in the ordinary course of business.
The Company monitors the status of legal proceedings and other contingencies on an ongoing basis to ensure loss contingencies are recognized and/or disclosed in its financial statements and footnotes. The Company does not believe there are any pending legal proceedings that are reasonably possible to result in a material loss. The Company is engaged in various legal actions in the normal course of business and, while there can be no assurances, the Company believes the outcome of all pending litigation involving the Company will not have, individually or in the aggregate, a material adverse effect on its business or financial statements.
Guarantees and Indemnities
The Company has made no significant contractual guarantees for the benefit of third parties. However, the Company generally indemnifies its customers from third-party intellectual property infringement litigation claims related to its products and, on occasion, also provides other indemnities related to product sales. In connection with certain facility leases, the Company has indemnified its lessors for certain claims arising from the facility or the lease.
The Company indemnifies its directors and officers to the maximum extent permitted under the laws of the state of Delaware. The duration of the indemnities varies and in many cases is indefinite. The indemnities to customers in connection with product sales generally are subject to limits based upon the amount of the related product sales and in many cases are subject to geographic and other restrictions. In certain instances, the Company’s indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities in
the accompanying consolidated balance sheets and does not expect that such obligations will have a material adverse impact on its financial statements.
10. STOCKHOLDERS’ EQUITY
Stock Repurchase
On January 26, 2021, the Board of Directors approved a stock repurchase program, pursuant to which the Company is authorized to repurchase up to $2.0 billion of its common stock from time to time prior to January 26, 2023, on the open market or in privately negotiated transactions, as permitted by securities laws and other legal requirements. During the three months ended December 30, 2022, the Company paid $166.2 million (including commissions) in connection with the repurchase of 1.8 million shares of its common stock (paying an average price of $90.57 per share). During the three months ended December 31, 2021, the Company paid $269.4 million (including commissions) in connection with the repurchase of 1.7 million shares of its common stock (paying an average price of $159.56 per share). As of December 30, 2022, $947.0 million remained available under the January 26, 2021 stock repurchase program.
On January 31, 2023, the Board of Directors approved a new stock repurchase program, pursuant to which the Company is authorized to repurchase up to $2.0 billion of its common stock from time to time through February 1, 2025, on the open market or in privately negotiated transactions, as permitted by securities laws and other legal requirements. This newly authorized stock repurchase program succeeds in its entirety the aforementioned January 26, 2021 stock repurchase program. The timing and amount of any shares of the Company’s common stock that are repurchased under the new repurchase program will be determined by the Company’s management based on its evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued at any time. The Company currently expects to fund the repurchase program using the Company’s working capital.
Dividends
On February 6, 2023, the Company announced that the Board of Directors had declared a cash dividend on the Company’s common stock of $0.62 per share. This dividend is payable on March 21, 2023, to the Company’s stockholders of record as of the close of business on February 28, 2023.
Dividends charged to retained earnings were as follows (in millions, except per share data):
2023
2022
Per Share
Total Amount
Per Share
Total Amount
First quarter
$
0.62
$
99.4
$
0.56
$
92.5
Share-based Compensation
The following table summarizes the share-based compensation expense by line item in the Consolidated Statements of Operations (in millions):
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share amounts):
Three Months Ended
December 30, 2022
December 31, 2021
Net income
$
309.4
$
399.9
Weighted average shares outstanding – basic
159.8
165.1
Dilutive effect of equity-based awards
0.4
1.3
Weighted average shares outstanding – diluted
160.2
166.4
Net income per share – basic
$
1.94
$
2.42
Net income per share – diluted
$
1.93
$
2.40
Anti-dilutive common stock equivalents
1.0
0.2
Basic earnings per share are calculated by dividing net income by the weighted average number of shares of the Company’s common stock outstanding during the period. The calculation of diluted earnings per share includes the dilutive effect of equity-based awards that were outstanding during the three months ended December 30, 2022, and December 31, 2021, using the treasury stock method. Shares issuable upon the vesting of performance stock awards are likewise included in the calculation of diluted earnings per share as of the date the condition(s) have been satisfied, assuming the end of the reporting period was the end of the contingency period. Certain of the Company’s outstanding share-based awards, noted in the table above, were excluded because they were anti-dilutive, but they could become dilutive in the future.
12. SUPPLEMENTAL FINANCIAL INFORMATION
Other current assets consist of the following (in millions):
As of
December 30, 2022
September 30, 2022
Prepaid expenses
$
266.2
$
242.3
Other
118.1
95.2
Total other current assets
$
384.3
$
337.5
Other current liabilities consist of the following (in millions):
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 (the “Securities Act”), 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 “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “seek,” “should,” “will,” “would,” 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 possible impacts of geopolitical conflicts, inflation, and the COVID-19 pandemic, as well as the development of new products, enhancements of technologies, sales levels, expense levels, the benefits of acquisitions we have made or may make in the future, 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 as of the date the statement is first made, such statements can only be based on facts and factors then 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 the 2022 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 the initial filing of this Quarterly Report on Form 10-Q. We caution readers not to place undue reliance upon any such forward-looking statements.
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.
Impact of COVID-19
The COVID-19 pandemic has affected 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. Like many companies in the semiconductor industry, we have experienced various supply constraints due to the pandemic. While we have worked with our global supply chain partners to mitigate this risk, the duration and extent of supply chain disruptions remain uncertain.
Three Months Ended December 30, 2022, and December 31, 2021
The following table sets forth the results of our operations expressed as a percentage of net revenue:
Three Months Ended
December 30, 2022
December 31, 2021
Net revenue
100.0
%
100.0
%
Cost of goods sold
52.0
52.7
Gross profit
48.0
47.3
Operating expenses:
Research and development
12.3
10.0
Selling, general, and administrative
6.4
5.4
Amortization of intangibles
1.6
2.2
Restructuring, impairment, and other charges
—
0.2
Total operating expenses
20.3
17.8
Operating income
27.6
29.5
Interest expense
1.3
0.7
Other income, net
—
0.1
Income before income taxes
26.4
28.9
Provision for income taxes
3.1
2.4
Net income
23.3
%
26.5
%
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, defense, entertainment and gaming, industrial, medical, smartphone, tablet, and wearable markets.
General
During the three months ended December 30, 2022, the following key factors contributed to our overall results of operations, financial position, and cash flows:
•Net revenue decreased to $1,329.3 million for the three months ended December 30, 2022, as compared to $1,510.4 million for the corresponding period in fiscal 2022, driven primarily by a decrease in demand for our mobile products from smartphone customers in the Asia-Pacific region.
•Our ending cash, cash equivalents, and marketable securities balance increased to $992.6 million. The increase in cash, cash equivalents, and marketable securities during the three months ended December 30, 2022, was primarily due to cash generated from operations of $773.4 million, partially offset by the repurchase of 1.8 million shares of common stock for $166.2 million, dividend payments of $99.4 million, and capital expenditures of $63.5 million.
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 for the three months ended December 30, 2022, as compared with the corresponding period in fiscal 2022, was driven primarily by a decrease in demand for our mobile products from smartphone customers in the Asia-Pacific region.
Gross Profit
Three Months Ended
December 30, 2022
Change
December 31, 2021
(dollars in millions)
Gross profit
$
637.7
(10.8)%
$
714.7
% of net revenue
48.0
%
47.3
%
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, share-based compensation, and amortization of acquisition intangibles, including inventory step-up 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 decrease in gross profit for the three months ended December 30, 2022, as compared with the corresponding period in fiscal 2022, was primarily the result of lower unit volumes with a gross profit impact of $147.7 million, partially offset by a favorable product mix with a gross profit impact of $83.6 million.
Research and Development
Three Months Ended
December 30, 2022
Change
December 31, 2021
(dollars in millions)
Research and development
$
163.9
8.5
%
$
151.1
% of net revenue
12.3
%
10.0
%
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, non-production masks, engineering prototypes, and design tool costs.
The increase in research and development expenses for the three months ended December 30, 2022, as compared with the corresponding period in fiscal 2022, 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 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 for the three months ended December 30, 2022, as compared with the corresponding period in fiscal 2022, was primarily related to an increase in professional services costs incurred during the period.
Amortization of Intangibles
Three Months Ended
December 30, 2022
Change
December 31, 2021
(dollars in millions)
Amortization of intangibles
$
21.9
(34.2)
%
$
33.3
% of net revenue
1.6
%
2.2
%
The decrease in amortization expense for the three months ended December 30, 2022, as compared with the corresponding period in fiscal 2022, was primarily due to reaching the end of the useful lives of certain intangible assets that were acquired in prior fiscal years.
Interest Expense
Three Months Ended
December 30, 2022
Change
December 31, 2021
(dollars in millions)
Interest expense
$
16.9
53.6
%
$
11.0
% of net revenue
1.3
%
0.7
%
The increase in interest expense for the three months ended December 30, 2022, as compared with the corresponding period in fiscal 2022, was due to an increase in the variable interest rate associated with the borrowing of the Term Loans (as defined below).
Provision for Income Taxes
Three Months Ended
December 30, 2022
Change
December 31, 2021
(dollars in millions)
Provision for income taxes
$
41.3
14.1
%
$
36.2
% of net revenue
3.1
%
2.4
%
We recorded a provision for income taxes of $41.3 million (which consisted of $26.4 million and $14.9 million related to United States and foreign income taxes, respectively) for the three months ended December 30, 2022.
The increase in income tax expense for the three months ended December 30, 2022, as compared with the corresponding period in fiscal 2022, was primarily due to a current period shortfall in tax deductions for share-based compensation, compared to windfall deductions in the prior year and an increase in deferred tax assets as a result of capitalizing research and development costs.
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 $191.7 million increase in cash provided by operating activities during the three months ended December 30, 2022, as compared with the corresponding period in fiscal 2022, was primarily related to favorable changes in working capital of $330.6 million, due primarily to a decrease in accounts receivable.
Cash used in investing activities:
Cash used in investing activities consists primarily of capital expenditures and cash paid to purchase marketable securities, offset by cash received related to the sale or maturity of marketable securities. The $125.1 million increase in cash used in investing activities during the three months ended December 30, 2022, as compared with the corresponding period in fiscal 2022, was primarily related to a $155.4 million increase in the net purchase of marketable securities, partially offset by a $32.3 million decrease in cash used for capital expenditures.
Cash used in financing activities:
Cash used in financing activities consists primarily of proceeds and payments related to our long-term borrowings and cash transactions related to equity. The $193.8 million decrease in cash used in financing activities during the three months ended December 30, 2022, as compared with the corresponding period in fiscal 2022, was primarily related to a decrease of $103.2 million in stock repurchase activity, a decrease of $50.0 million for the repayment of Term Loans, a decrease of $48.2 million related to the minimum statutory payroll tax withholdings upon vesting of employee performance and restricted stock awards, partially offset by an increase of $6.9 million in dividend payments.
Liquidity:
Cash, cash equivalents, and marketable securities totaled $992.6 million as of December 30, 2022, representing an increase of $405.8 million from September 30, 2022.
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 (the “Notes”). We have a term credit agreement (the “Term Credit Agreement”) providing for a $1.0 billion term loan facility (the “Term Loan Facility”). On July 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 to acquire the Infrastructure and Automotive business of Silicon Laboratories Inc. and to pay fees and expenses incurred in connection therewith. During the three months ended December 31, 2021, we repaid $50.0 million of outstanding borrowings under the Term Loans. As of December 30, 2022, there were $700.0 million of borrowings outstanding under the Term Credit Agreement. The Term Credit Agreement expires July 26, 2024. 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 of December 30, 2022, there were no borrowings outstanding under the revolving credit facility (the “Revolver”). The Revolving Credit Agreement expires July 26, 2026.
Based on our historical results of operations, we expect that our cash, cash equivalents, and marketable securities on hand, 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 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: money market funds, U.S. Treasury securities, agency securities, corporate debt securities, and commercial paper.
Our contractual obligations disclosure in the 2022 10-K has not materially changed since we filed that report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to overall financial market risks, such as changes in market liquidity, credit quality, investment risk, interest rate risk, and foreign exchange rate risk as described below.
Investment and Interest Rate Risk
Our exposure to interest rate and general market risks relates to our Term Credit Facility, which has variable interest rates, and our investment portfolio. As of December 30, 2022, there were $700.0 million of borrowings outstanding under the Term Credit Agreement, and a potential change in the associated interest rates would be immaterial to the results of our operations. Our investment portfolio consists of cash and cash equivalents (money market funds and marketable securities purchased with less than ninety days until maturity) that total approximately $819.9 million, and marketable securities (U.S. Treasury and government securities, corporate bonds and notes, and municipal bonds) that total approximately $172.7 million within short-term marketable securities as of December 30, 2022.
The main objectives of our investment activities are liquidity and preservation of capital. Our cash equivalent investments have short-term maturity periods that dampen the impact of market or interest rate risk. Our marketable securities have short-term maturity periods less than one year. Credit risk associated with our investments is not material because our investments are diversified across several types of securities with high credit ratings, which reduces the amount of credit exposure to any one investment.
Based on our results of operations for the three months ended December 30, 2022, a hypothetical reduction in the interest rates on our cash, cash equivalents, and other investments to zero would result in an immaterial reduction of interest income with a de minimis impact on income before taxes.
We do not believe that investment or interest rate risks currently pose material exposures to our business or results of operations.
Foreign Exchange Rate Risk
Substantially all sales to customers and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, thereby reducing the impact of foreign exchange rate fluctuations on our results. A percentage of our international operational expenses are denominated in foreign currencies, and exchange rate volatility could positively or negatively impact those operating costs. Increases in the value of the United States dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States dollar relative to other currencies could result in our suppliers raising their prices to continue doing business with us. Given the relatively small number of customers and arrangements with third-party manufacturers denominated in foreign currencies, we do not believe that foreign exchange volatility has a material impact on our current business or results of operations. However, fluctuations in currency exchange rates could have a greater effect on our business or results of operations in the future to the extent our expenses increasingly become denominated in foreign currencies.
We may enter into foreign currency forward and options contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows, and net investments in foreign subsidiaries. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. For the three months ended December 30, 2022, we had no outstanding foreign currency forward or options contracts with financial institutions.
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 30, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on management’s evaluation of our disclosure controls and procedures as of December 30, 2022, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There are no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the first quarter of fiscal 2023 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Refer to Note 9 of the Notes to Consolidated Financial Statements for a detailed discussion.
ITEM 1A. RISK FACTORS.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in the 2022 10-K, which could materially affect our business, financial condition, or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information regarding repurchases of common stock made during the three months ended December 30, 2022:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
10/1/2022 - 10/28/22
500,000
$87.71
500,000
$1.1 billion
10/29/22 - 11/25/22
591,200
(2)
$91.20
245,904
$1.0 billion
11/26/22 - 12/30/22
1,091,165
(3)
$91.93
1,089,107
$0.9 billion
Total
2,182,365
1,835,011
(1) The stock repurchase program approved by the Board of Directors on January 26, 2021 authorizes the repurchase of up to $2.0 billion of our common stock from time to time on the open market or in privately negotiated transactions as permitted by securities laws and other legal requirements, and expired on January 26, 2023. On January 31, 2023, the Board of Directors approved a new $2.0 billion stock repurchase program that expires on February 2, 2025, and succeeds in its entirety the January 26, 2021 stock repurchase program.
(2) 245,904 shares were repurchased at an average price of $90.36 per share as part of our stock repurchase program, and 345,296 shares were repurchased by us at the fair market value of the common stock as of the applicable purchase date, in connection with the satisfaction of tax withholding obligations under equity award agreements with an average price of $91.80 per share.
(3) 1,089,107 shares were repurchased at an average price of $91.94 per share as part of our stock repurchase program, and 2,058 shares were repurchased by us at the fair market value of the common stock as of the applicable purchase date, in connection with the satisfaction of tax withholding obligations under equity award agreements with an average price of $91.25 per share.
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* Indicates a management contract or compensatory plan or arrangement.
^ Portions of this exhibit have been omitted because such information is not material and is the type of information that the Registrant treats as private or confidential.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
