10-Q: SkyWater Technology Reports Increased Revenue but Ongoing Internal Control Weaknesses in Q3 2024

SkyWater Technology saw a significant revenue increase in Q3 2024, driven by growth in advanced technology services and tools revenue, but continues to grapple with material weaknesses in internal controls.

Summary

• SkyWater Technology reported a 31% increase in revenue for the third quarter of 2024, reaching $93.8 million, compared to $71.6 million in the same period last year.
• The company's revenue for the first nine months of 2024 was $266.8 million, a 29% increase from $207.5 million in the first nine months of 2023.
• The revenue growth was primarily driven by a rise in Advanced Technology Services (ATS) development revenue and tools revenue, while Wafer Services revenue decreased.
• Cost of revenue increased to $73.6 million in Q3 2024, up from $57.5 million in Q3 2023, mainly due to higher costs associated with tools revenue and facility expansion.
• Despite the revenue growth, SkyWater reported a net income of $1.5 million attributable to SkyWater Technology, Inc. for Q3 2024, compared to a net loss of $7.6 million in Q3 2023.
• For the first nine months of 2024, the company reported a net loss of $6.1 million attributable to SkyWater Technology, Inc., compared to a net loss of $20.4 million in the same period of 2023.
• The company continues to experience material weaknesses in its internal control over financial reporting, specifically related to control activities and revenue accounting processes.
• SkyWater has a revolving line of credit with a borrowing limit of $100 million, with $21.3 million outstanding as of September 29, 2024, and $75.6 million remaining available.
• The company has a support letter from Oxbow Industries for up to $12.5 million in funding, if needed, expiring March 18, 2026.

Sentiment

Score: 6

Explanation: The document shows positive revenue growth and improved profitability, but the ongoing material weaknesses in internal controls and the decrease in Wafer Services revenue temper the overall sentiment. The company's reliance on a few major customers and the need for continued access to capital also add to the uncertainty.

Positives

• SkyWater experienced a substantial increase in revenue, driven by growth in ATS development and tools revenue.
• The company achieved net income attributable to SkyWater Technology, Inc. in Q3 2024, a significant improvement from the net loss in the same period last year.
• Adjusted EBITDA increased year-over-year, indicating improved operational performance.
• The company has a significant amount of available credit under its revolving credit facility.
• SkyWater has a support letter from Oxbow Industries for up to $12.5 million in funding, if needed, expiring March 18, 2026.

Negatives

• SkyWater continues to have material weaknesses in its internal control over financial reporting.
• Wafer Services revenue decreased significantly due to reduced activity in the automotive sector.
• The company reported a net loss for the first nine months of 2024.
• Cost of revenue increased significantly due to higher tools revenue costs and facility expansion.

Risks

• The company's ability to execute its operating strategy depends on maintaining liquidity and access to capital.
• SkyWater's financial performance is subject to macroeconomic and competitive conditions, including cyclicality and consolidation in the semiconductor industry.
• The company's reliance on a few major customers poses a risk to its operating results and financial condition.
• The company's ability to remediate material weaknesses in internal control over financial reporting is critical for future financial stability.
• The company's ability to access additional funds depends on prevailing economic conditions and other factors, many of which are beyond SkyWater's control.

Future Outlook

SkyWater anticipates that customer-funded capital investment will be a significant driver of its business model and expects customers to invest in its capabilities to develop technology platforms that will drive future growth. The company believes it has sufficient liquidity to fund operations for the next twelve months, based on operating forecasts, cash on hand, available borrowings, and potential cost reduction measures.

Management Comments

• Management believes SkyWater will have sufficient liquidity to fund its operations for the next twelve months.
• Management has identified specific actions it could take to reduce operating costs to improve cash flow, including reductions in spending and delays in hiring personnel.
• Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary.

Industry Context

The report highlights SkyWater's position as a U.S.-based, independent, pure-play technology foundry, which is benefiting from the U.S. government's focus on strengthening domestic semiconductor supply chains through initiatives like the CHIPS Act. The company's focus on advanced technology services and its ability to co-develop process technology with customers positions it well in the current market environment.

Comparison to Industry Standards

• SkyWater's revenue growth of 31% in Q3 2024 is strong compared to some of its peers in the semiconductor industry, although specific comparisons are difficult without detailed financial data from competitors.
• The company's focus on advanced technology services and co-development with customers is a differentiated approach compared to traditional foundries like TSMC or GlobalFoundries, which primarily focus on high-volume manufacturing.
• The decrease in Wafer Services revenue due to automotive sector weakness is consistent with broader industry trends, where automotive chip demand has been volatile.
• The ongoing material weaknesses in internal controls are a concern, as they are not in line with the standards expected of a publicly traded company, and may be a point of concern for investors compared to other companies in the sector.

Related Party Transactions

• SkyWater has a support letter from Oxbow Industries, an affiliate of its principal stockholder, to provide funding up to $12.5 million, if necessary.
• SkyWater leases its Minnesota facility from Oxbow Realty, a variable interest entity (VIE) controlled by Oxbow Industries.

Stakeholder Impact

• Shareholders will be encouraged by the revenue growth and improved profitability, but concerned about the ongoing internal control weaknesses.
• Employees may be affected by potential cost reduction measures, including delays in hiring.
• Customers will benefit from SkyWater's continued investment in its capabilities and the development of new technologies.
• Creditors will be monitoring SkyWater's compliance with financial covenants and its ability to maintain liquidity.

Next Steps

• SkyWater plans to sustain the execution of process-level and information technology controls implemented or enhanced in fiscal year 2023 throughout fiscal year 2024 to remediate material weaknesses.
• The company will continue to evaluate and work to remediate the control deficiencies that gave rise to the material weaknesses in the Control Activities components of the COSO Framework and its revenue accounting process.
• SkyWater will continue to invest in its development and manufacturing capabilities to meet customer demand and expand into new markets.

Key Dates

Keywords

semiconductor, foundry, advanced technology services, wafer services, revenue, EBITDA, internal control, CHIPS Act, manufacturing, capital expenditure