SKYWORKS SOLUTIONS, INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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 and mixed-signal 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. 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 uncertain and could still result in significant disruptions to our business operations, as well as negative impacts to our financial condition. RESULTS OF OPERATIONS Fiscal Years Ended September 29, 2023, September 30, 2022, and October 1, 2021. 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 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 (the “2022 10-K”), for Management’s Discussions and Analysis of Financial Condition and Results of Operations for the fiscal year ended October 1, 2021. Fiscal Years Ended September 29, 2023 September 30, 2022 October 1, 2021 Net revenue 100.0 % 100.0 % 100.0 % Cost of goods sold 55.8 52.5 50.8 Gross profit 44.2 47.5 49.2 Operating expenses: Research and development 12.7 11.3 10.3 Selling, general, and administrative 6.6 6.0 6.3 Amortization of intangibles 0.7 1.8 0.7 Restructuring, impairment, and other charges 0.6 0.6 0.2 Total operating expenses 20.6 19.7 17.6 Operating income 23.6 27.8 31.6 Interest expense (1.3) (0.9) (0.3) Other income (expense), net 0.4 — — Income before income taxes 22.6 26.9 31.3 Provision for income taxes 2.0 3.7 2.0 Net income 20.6 % 23.2 % 29.3 % 30 General During the fiscal year ended September 29, 2023, the following key factors contributed to our overall results of operations, financial position, and cash flows: • Net revenue decreased 13.0% to $4,772.4 million in fiscal 2023, as compared to $5,485.5 million in fiscal 2022, driven primarily by a decrease in demand for our mobile products from smartphone customers in the Android ecosystem and for our connectivity solutions in consumer and enterprise markets. • Our ending cash, cash equivalents, and marketable securities balance increased 26% to $738.5 million in fiscal 2023, as compared to $586.8 million in fiscal 2022. The increase in cash, cash equivalents, and marketable securities during fiscal 2023 was primarily due to cash generated from operations of $1,856.4 million, partially offset by repayments of debt of $900.0 million, dividend payments of $405.2 million, and capital expenditures of $210.3 million. Net Revenue Fiscal Years Ended September 29, 2023 Change September 30, 2022 Change October 1, 2021 (dollars in millions) Net revenue $ 4,772.4 (13.0)% $ 5,485.5 7.4% $ 5,109.1 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 2023, as compared to fiscal 2022, was driven primarily by a decrease in demand for our mobile products from smartphone customers in the Android ecosystem and for our connectivity solutions in consumer and enterprise markets. 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 Fiscal Years Ended September 29, 2023 Change September 30, 2022 Change October 1, 2021 (dollars in millions) Gross profit $ 2,107.3 (19.1)% $ 2,604.3 3.7% $ 2,512.4 % of net revenue 44.2 % 47.5 % 49.2 % 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. 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 intend to improve gross profit 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 decrease in gross profit in fiscal 2023, as compared to fiscal 2022, was primarily the result of lower unit volumes, impairment charges on long-term supply capacity deposits, and lower average selling prices with a gross profit impact of $572.0 million, $47.5 million, and $41.8 million, respectively, partially offset by a favorable product mix with a gross profit impact of $261.2 million. 31 Research and Development Fiscal Years Ended September 29, 2023 Change September 30, 2022 Change October 1, 2021 (dollars in millions) Research and development $ 606.8 (1.8)% $ 617.9 16.1% $ 532.3 % of net revenue 12.7 % 11.3 % 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, non-production masks, engineering prototypes, and design tool costs. The decrease in research and development expense in fiscal 2023, as compared to fiscal 2022, was primarily related to a decrease in headcount-related expenses. Selling, General, and Administrative Fiscal Years Ended September 29, 2023 Change September 30, 2022 Change October 1, 2021 (dollars in millions) Selling, general, and administrative $ 314.0 (4.8)% $ 329.8 2.3% $ 322.5 % of net revenue 6.6 % 6.0 % 6.3 % 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 decrease in selling, general, and administrative expenses in fiscal 2023, as compared to fiscal 2022, was primarily related to a decrease in headcount-related expenses, including share-based compensation. Amortization of Intangibles Fiscal Years Ended September 29, 2023 Change September 30, 2022 Change October 1, 2021 (dollars in millions) Amortization of intangibles $ 33.2 (66.4)% $ 98.9 174.7% $ 36.0 % of net revenue 0.7 % 1.8 % 0.7 % The decrease in amortization expense for fiscal 2023, as compared to fiscal 2022, was primarily due to certain intangible assets that were acquired in prior fiscal years reaching the end of their useful lives. Restructuring, Impairment, and Other Charges Fiscal Years Ended September 29, 2023 Change September 30, 2022 Change October 1, 2021 (dollars in millions) Restructuring, impairment, and other charges $ 28.3 (7.8)% $ 30.7 244.9% $ 8.9 % of net revenue 0.6 % 0.6 % 0.2 % Restructuring, impairment, and other charges incurred in fiscal 2023 were primarily due to employee severance costs and impairment charges on divested assets. Restructuring, impairment, and other charges incurred in fiscal 2022 were primarily related to the abandonment of previously capitalized in-process research and development projects. 32 Interest Expense Fiscal Years Ended September 29, 2023 Change September 30, 2022 Change October 1, 2021 (dollars in millions) Interest expense $ 64.4 34.4% $ 47.9 100.0% $ 13.4 % of net revenue 1.3 % 0.9 % 0.3 % The increase in interest expense for fiscal 2023, as compared to fiscal 2022, was due to an increase in the variable interest rate associated with the borrowing on the Term Loans, partially offset by a lower average balance of debt outstanding. Other Income (Expense), net Fiscal Years Ended September 29, 2023 Change September 30, 2022 Change October 1, 2021 (dollars in millions) Other income (expense), net $ 18.2 828.0% $ (2.5) 316.7% $ (0.6) % of net revenue 0.4 % — % — % The increase in other income for fiscal 2023, as compared to fiscal 2022, was due to an increase in interest income as a result of higher interest rates. Provision for Income Taxes Fiscal Years Ended September 29, 2023 Change September 30, 2022 Change October 1, 2021 (dollars in millions) Provision for income taxes $ 96.0 (52.3)% $ 201.4 100.6% $ 100.4 % of net revenue 2.0 % 3.7 % 2.0 % We recorded a provision for income taxes of $96.0 million (which consisted of $62.0 million and $34.0 million related to United States and foreign income taxes, respectively) and $201.4 million (which consisted of $132.8 million and $68.6 million related to United States and foreign income taxes, respectively) for fiscal 2023 and fiscal 2022, respectively. The decrease in income tax expense for fiscal 2023, as compared with the corresponding period in fiscal 2022, was primarily due to lower income from operations, a decrease in tax on global intangible low-taxed income (“GILTI”), an increase in the benefit from foreign-derived intangible income deduction (“FDII”), partially offset by a current period shortfall in tax deductions for share-based compensation, compared to windfall deductions in the prior year. In August 2022, the U.S. government enacted the Inflation Reduction Act, which imposes a corporate alternative minimum tax (“CAMT”) of 15% on corporations with three-year average annual adjusted financial statement income exceeding $1.0 billion, as well as a 1% excise tax on corporate stock repurchases made after December 31, 2022. We are currently evaluating the impact this law may have on our effective tax rate. CAMT is effective for the Company in fiscal year 2024. See Note 8 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: 33 Fiscal Years Ended (in millions) September 29, 2023 September 30, 2022 October 1, 2021 Cash and cash equivalents at beginning of period $ 566.0 $ 882.9 $ 566.7 Net cash provided by operating activities 1,856.4 1,424.6 1,772.0 Net cash used in investing activities (224.4) (378.9) (3,133.2) Net cash (used in) provided by financing activities (1,479.2) (1,362.6) 1,677.4 Cash and cash equivalents at end of period $ 718.8 $ 566.0 $ 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 $431.8 million increase in cash provided by operating activities for fiscal 2023, as compared to fiscal 2022, was primarily related to favorable changes in working capital of $988.5 million, due primarily to a decrease in accounts receivable and inventory, partially offset by lower net income. Cash used in investing activities: Cash used in investing activities consists primarily of capital expenditures and cash paid related to the purchase of marketable securities, offset by cash received related to the sale or maturity of marketable securities. The $154.5 million decrease in cash used in investing activities for fiscal 2023, as compared to fiscal 2022, was primarily related to a decrease of $279.1 million in cash used for capital expenditures, partially offset by a decrease of $117.9 million in the net sale of marketable securities. 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 $116.6 million increase in cash used in financing activities for fiscal 2023, as compared to fiscal 2022, was primarily related to an increase of $850.0 million for the repayment of debt, an increase of $32.1 million in dividend payments, partially offset by a decrease of $711.5 million in stock repurchase activity, and a decrease of $52.6 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 $738.5 million as of September 29, 2023, representing an increase of $151.7 million from September 30, 2022. We have outstanding $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 for the acquisition of the Infrastructure and Automotive business of Silicon Laboratories Inc. and to pay fees and expenses incurred in connection therewith. During fiscal 2023, 2022, and 2021, we repaid $400.0 million, $50.0 million, and $250.0 million, of outstanding borrowings under the Term Loans, respectively. As of September 29, 2023, there were $300.0 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 of September 29, 2023, there were no borrowings outstanding under the revolving credit facility (the “Revolver”). The Revolving Credit Agreement expires July 26, 2026. For a description of contractual obligations, such as taxes, leases, purchase commitments, and debt, see Note 8, Note 10, Note 11, and Note 16 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, 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 34 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, municipal bonds, and agency securities. 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 estimates 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 estimates include revenue recognition, which impacts the recording of net revenue; inventory valuation, which impacts the cost of goods sold and gross margin; 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. Changes in actual demand or market conditions could adversely or beneficially impact our reserve calculations. 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.