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SkyWater Technology, Inc 10-K Analysis & Summary – 3/14/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

SkyWater Technology, Inc.

Filing date:

03/14/2025

TLDR:

ELI5:

SkyWater, a semiconductor company, made more money this year, but still has some problems with how they track their finances and relies heavily on a few big customers. They are also buying a new factory, which could be good, but also risky.

Accession #:

0001819974-25-000010

Published on

Analyst Summary

  • Revenue increased by 19% year-over-year, driven by Advanced Technology Services (ATS) and customer-funded tool revenue, while Wafer Services revenue declined.
  • Gross profit margin increased slightly to 20.3% from 20.7% in the prior year.
  • Net loss improved significantly, decreasing by 90% to $(2.5) million.
  • Adjusted EBITDA decreased by 8% to $34.3 million, reflecting lower margins on tool revenue and increased operating costs.
  • The company is addressing a material weakness in internal control over financial reporting, specifically related to revenue accounting processes.
  • A significant portion of revenue is derived from a small number of customers, posing a concentration risk.
  • R&D expenses increased by 48%, indicating investment in future technologies.
  • Operating income improved from a loss of $14.8 million in 2023 to an income of $6.6 million in 2024.
  • Current Ratio decreased from 1.01 to 0.86, indicating potential liquidity issues.
  • Debt-to-Equity Ratio decreased slightly from 4.22 to 3.94, but remains high.

Opportunities and Risks

  • Opportunity: Leveraging Trusted Foundry status and USG investments through the CHIPS Act.
  • Opportunity: Growing presence in advanced packaging, rad-hard markets, and new end markets.
  • Opportunity: Co-developing next-generation technologies with customers and expanding ATS.
  • Opportunity: Pursuing M&A opportunities to drive growth and expand capabilities.
  • Risk: Potential damage to foundries, defects in products, and inability to achieve satisfactory yields.
  • Risk: Cyclicality of the semiconductor industry, intense competition, and potential loss of key customers.
  • Risk: Increased leverage due to the Fab 25 acquisition, potential need for additional capital, and restrictive covenants in debt agreements.
  • Risk: Compliance with government contracting requirements, export controls, and environmental regulations.
  • Risk: Potential breaches of security systems and cyberattacks.
  • Risk: Challenges in integrating Fab 25 and realizing anticipated benefits.

Potential Implications

Company Performance

  • Successful remediation of the material weakness in internal controls is crucial for maintaining investor confidence and reducing regulatory risk.
  • Diversification of the customer base is necessary to mitigate the risk associated with customer concentration.
  • Effective integration of Fab 25 is critical for realizing anticipated benefits and avoiding operational disruptions.
  • Continued investment in R&D is essential for maintaining a competitive edge in advanced technologies.
  • The company’s ability to manage debt levels and maintain financial flexibility will impact its long-term growth prospects.

Stock Price

  • Positive: Successful remediation of the material weakness and diversification of the customer base could lead to increased investor confidence and a higher stock price.
  • Positive: Securing government funding and expanding into new markets could drive revenue growth and positively impact the stock price.
  • Negative: Failure to integrate Fab 25 successfully or a significant downturn in the semiconductor industry could negatively impact the stock price.
  • Negative: Continued losses and liquidity issues could lead to a decline in the stock price.

SkyWater Technology, Inc. (SKYT) – 10-K Filing Analysis

Executive Summary

This report analyzes SkyWater Technology’s 10-K filing for the fiscal year ended December 29, 2024. SkyWater, a U.S.-based pure-play technology foundry, is navigating a complex industry landscape with both risks and opportunities. While revenue increased, driven by customer-funded tool revenue, the company continues to face challenges related to a material weakness in internal controls, cyclical industry trends, and customer concentration. The pending acquisition of Fab 25 from Infineon presents both potential benefits and integration risks. Overall, a cautious approach is warranted, focusing on risk mitigation and strategic execution.

Company Overview

SkyWater Technology, Inc. is a U.S.-based pure-play technology foundry specializing in advanced semiconductor development and manufacturing. The company operates through two main segments: Advanced Technology Services (ATS) and Wafer Services. SkyWater serves diverse, high-growth end users in advanced compute, aerospace and defense, automotive, bio-health, and industrial markets. A key differentiator is its DMEA Category 1A Trusted Accreditation from the DoD, positioning it favorably for government contracts.

Detailed Analysis

Management’s Discussion and Analysis (MD&A)

Management highlights revenue growth driven by ATS and customer-funded tool revenue. However, they also acknowledge challenges in Wafer Services due to softening automotive demand. The MD&A emphasizes strategic initiatives like diversifying the customer base, expanding advanced packaging capabilities, and leveraging the CHIPS Act. A key concern is the ongoing material weakness in internal control over financial reporting, specifically related to revenue accounting processes.

Financial Statement Analysis

Key Ratios and Trends

  • Revenue Growth: 19% year-over-year, driven by ATS and customer-funded tool revenue.
  • Gross Profit Margin: Increased to 20.3% from 20.7% in the prior year.
  • Net Loss: Improved significantly, decreasing by 90% to $(2.5) million.
  • Adjusted EBITDA: Decreased by 8% to $34.3 million, reflecting lower margins on tool revenue and increased operating costs.
  • R&D Expenses: Increased by 48%, indicating investment in future technologies.
  • SG&A Expenses: Decreased by 25%, primarily due to one-time expenses in the prior year.

Visual Aids

Metric 2024 2023
Revenue (in thousands) $342,269 $286,682
Net Loss (in thousands) $(2,517) $(25,093)
Adjusted EBITDA (in thousands) $34,281 $37,247

Red Flags and Uncommon Metrics

  • Material Weakness: The persistent material weakness in internal control over financial reporting, particularly in revenue accounting, is a significant concern.
  • Customer Concentration: A significant portion of revenue is derived from a small number of customers, posing a risk if these relationships deteriorate.
  • Tool Revenue Margin: The lower margin profile of customer-funded tool revenue, while driving top-line growth, impacts overall profitability.

Risk and Opportunity Assessment

Risks

  • Operational Risks: Potential damage to foundries, defects in products, and inability to achieve satisfactory yields.
  • Market Risks: Cyclicality of the semiconductor industry, intense competition, and potential loss of key customers.
  • Financial Risks: Increased leverage due to the Fab 25 acquisition, potential need for additional capital, and restrictive covenants in debt agreements.
  • Regulatory Risks: Compliance with government contracting requirements, export controls, and environmental regulations.
  • Cybersecurity Risks: Potential breaches of security systems and cyberattacks.
  • Integration Risks: Challenges in integrating Fab 25 and realizing anticipated benefits.

Opportunities

  • Government Funding: Leveraging Trusted Foundry status and USG investments through the CHIPS Act.
  • Market Expansion: Growing presence in advanced packaging, rad-hard markets, and new end markets.
  • Technology Leadership: Co-developing next-generation technologies with customers and expanding ATS.
  • Strategic Acquisitions: Pursuing M&A opportunities to drive growth and expand capabilities.

Conclusion and Actionable Insights

SkyWater is at a pivotal juncture, balancing growth initiatives with significant operational and financial risks. The company’s strategic focus on government contracts and advanced technologies presents opportunities, but the material weakness in internal controls and customer concentration require immediate attention. The Fab 25 acquisition could be transformative, but successful integration is critical.

Recommendations

  • Remediate Material Weakness: Prioritize and expedite the remediation of the material weakness in internal control over financial reporting to enhance investor confidence and reduce regulatory risk.
  • Diversify Customer Base: Actively pursue diversification of the customer base to mitigate the risk associated with customer concentration.
  • Manage Acquisition Risks: Develop a comprehensive integration plan for Fab 25, focusing on cost control, operational efficiency, and cultural alignment.
  • Monitor Market Conditions: Closely monitor macroeconomic trends and industry cyclicality to proactively adjust production and manage inventory levels.
  • Capital Management: Carefully manage debt levels and explore alternative financing options to maintain financial flexibility.

1. Commentary

SkyWater Technology’s financial performance shows a mixed picture. Revenue increased by 19% year-over-year, driven primarily by growth in ATS development and Tools revenue, while Wafer Services revenue declined significantly. The company improved its operating income from a loss of $14.8 million in 2023 to an income of $6.6 million in 2024. However, the company still reported a net loss attributable to SkyWater Technology, Inc. of $6.8 million, although this is a substantial improvement from the $30.8 million loss in the prior year.

2. Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin

    • Metric: 20.35% (2024: $69,626 / $342,269)
    • Trend: Increased from 20.68% in 2023 ($59,292 / $286,682), a decrease of 1.58%.
    • Industry: The semiconductor industry has a wide range of gross profit margins, but generally, a healthy margin is considered to be above 40%. SkyWater’s margin is significantly lower, indicating potential challenges in cost management or pricing.
  • Operating Profit Margin

    • Metric: 1.92% (2024: $6,560 / $342,269)
    • Trend: Improved significantly from -5.16% in 2023 ($-14,788 / $286,682), a change of 137.21%.
    • Industry: A good operating margin for semiconductor companies is typically in the range of 15-30%. SkyWater’s margin is below this range, but the improvement is a positive sign.
  • Net Profit Margin

    • Metric: -0.74% (2024: $-2,517 / $342,269)
    • Trend: Improved from -8.75% in 2023 ($-25,093 / $286,682), a change of 91.54%.
    • Industry: The semiconductor industry typically aims for a net profit margin of 10-20%. SkyWater’s negative margin indicates that the company is not yet profitable, but the trend is moving in the right direction.
  • Return on Assets (ROA)

    • Metric: -0.80% (2024: $-2,517 / $313,775)
    • Trend: Improved from -7.92% in 2023 ($-25,093 / $316,756), a change of 89.9%.
    • Industry: A good ROA for semiconductor companies is generally considered to be above 5%. SkyWater’s negative ROA indicates that the company is not effectively using its assets to generate profit.
  • Return on Equity (ROE)

    • Metric: -3.96% (2024: $-2,517 / $63,490)
    • Trend: Improved from -41.34% in 2023 ($-25,093 / $60,701), a change of 90.43%.
    • Industry: A good ROE for semiconductor companies is typically above 10%. SkyWater’s negative ROE indicates that the company is not generating a return for its shareholders.
  • Earnings Per Share (EPS) – Basic and Diluted

    • Metric: $(0.14) (2024: $-6,793 / 47,396)
    • Trend: Improved from $(0.68) in 2023 ($-30,756 / 45,507), a change of 79.41%.
    • Industry: EPS varies widely in the semiconductor industry. SkyWater’s negative EPS reflects its current unprofitability, but the improvement is encouraging.

Liquidity

  • Current Ratio

    • Metric: 0.86 (2024: $132,077 / $154,327)
    • Trend: Decreased from 1.01 in 2023 ($146,375 / $144,197), a change of -14.85%.
    • Industry: A current ratio of 1.5 to 2 is generally considered healthy. SkyWater’s ratio is below 1, indicating potential liquidity issues.
  • Quick Ratio (Acid-Test Ratio)

    • Metric: 0.77 (2024: ($132,077 – $14,535) / $154,327)
    • Trend: Decreased from 0.91 in 2023 (($146,375 – $15,341) / $144,197), a change of -15.38%.
    • Industry: A quick ratio of 1 or higher is generally considered ideal. SkyWater’s ratio is below 1, suggesting that the company may have difficulty meeting its short-term obligations without relying on inventory.
  • Cash Ratio

    • Metric: 0.12 (2024: $18,844 / $154,327)
    • Trend: Increased from 0.13 in 2023 ($18,382 / $144,197), a change of -7.69%.
    • Industry: A cash ratio of 0.5 or higher is often seen as a sign of good liquidity. SkyWater’s low cash ratio indicates that the company has limited cash reserves to cover its current liabilities.

Solvency/Leverage

  • Debt-to-Equity Ratio

    • Metric: 3.94 (2024: $250,285 / $63,490)
    • Trend: Decreased from 4.22 in 2023 ($256,055 / $60,701), a change of -6.64%.
    • Industry: A debt-to-equity ratio of 1 to 1.5 is generally considered acceptable. SkyWater’s high ratio indicates that the company relies heavily on debt financing.
  • Debt-to-Assets Ratio

    • Metric: 0.797 (2024: $250,285 / $313,775)
    • Trend: Decreased from 0.81 in 2023 ($256,055 / $316,756), a change of -1.6%.
    • Industry: A debt-to-assets ratio below 0.5 is generally preferred. SkyWater’s high ratio suggests that a significant portion of its assets are financed by debt.
  • Interest Coverage Ratio (Times Interest Earned)

    • Metric: -0.26 (2024: $-2,277 / $8,837)
    • Trend: Improved from -2.37 in 2023 ($-25,614 / $10,826), a change of 89.03%.
    • Industry: An interest coverage ratio of 4 or higher is generally considered safe. SkyWater’s negative ratio indicates that the company is not generating enough operating income to cover its interest expenses.

Activity/Efficiency

  • Inventory Turnover

    • Metric: 14.15 (2024: $272,643 / (($15,341 + $14,535)/2))
    • Trend: Increased from 14.77 in 2023 ($227,390 / (($15,341 + $18,634)/2)), a change of -4.2%.
    • Industry: Inventory turnover varies widely depending on the specific products and business model.
  • Days Sales Outstanding (DSO)

    • Metric: 58.07 (2024: ($54,332 / $342,269) * 365)
    • Trend: Decreased from 83.74 in 2023 (($65,961 / $286,682) * 365), a change of -30.65%.
    • Industry: DSO varies by industry and customer payment terms. A lower DSO is generally better, as it indicates that the company is collecting its receivables more quickly.
  • Days Payable Outstanding (DPO)

    • Metric: 39.57 (2024: ($29,590 / $272,643) * 365)
    • Trend: Increased from 31.40 in 2023 (($19,614 / $227,390) * 365), a change of 25.9%.
    • Industry: DPO should be analyzed in conjunction with DSO. A higher DPO can indicate that the company is taking longer to pay its suppliers, which can be a sign of financial stress or a deliberate strategy to manage cash flow.
  • Asset Turnover

    • Metric: 1.09 (2024: $342,269 / $313,775)
    • Trend: Increased from 0.91 in 2023 ($286,682 / $316,756), a change of 19.78%.
    • Industry: Asset turnover varies by industry. A higher asset turnover indicates that the company is effectively using its assets to generate revenue.

Valuation

  • Price-to-Earnings Ratio (P/E)

    • Metric: Negative (Since EPS is negative)
    • Trend: N/A
    • Industry: P/E ratios are not meaningful for companies with negative earnings.
  • Price-to-Book Ratio (P/B)

    • Metric: 1.14 (2025-03-14: $8.15 * 47,704 / $63,490)
    • Trend: N/A
    • Industry: P/B ratios vary by industry. A P/B ratio above 1 may indicate that the stock is overvalued, while a ratio below 1 may indicate that it is undervalued.
  • Price-to-Sales Ratio (P/S)

    • Metric: 0.11 (2025-03-14: $8.15 * 47,704 / $342,269)
    • Trend: N/A
    • Industry: P/S ratios vary by industry. A lower P/S ratio may indicate that the stock is undervalued.
  • Enterprise Value to EBITDA (EV/EBITDA)

    • Metric: 23.97 (2025-03-14: (47,704 * $8.15) + $39,777 – $18,844) / $20,526
    • Trend: N/A
    • Industry: EV/EBITDA ratios vary by industry. A higher ratio may indicate that the stock is overvalued, while a lower ratio may indicate that it is undervalued.

Growth Rates

  • Revenue Growth

    • Metric: 19% (Calculated above)
    • Trend: N/A
    • Industry: Semiconductor industry growth rates vary depending on market conditions and specific product segments.
  • Net Income Growth

    • Metric: 90% (Calculated above)
    • Trend: N/A
    • Industry: Semiconductor industry growth rates vary depending on market conditions and specific product segments.
  • EPS Growth

    • Metric: 79.41% (Calculated above)
    • Trend: N/A
    • Industry: Semiconductor industry growth rates vary depending on market conditions and specific product segments.

Other Relevant Metrics

  • Adjusted EBITDA
    • Metric: $34,281 (2024)
    • Trend: Decreased from $37,247 in 2023, a change of -7.96%.
    • Analysis: Adjusted EBITDA is a non-GAAP metric that excludes certain expenses to provide a clearer picture of the company’s core operating performance. The decrease in Adjusted EBITDA suggests that the underlying profitability of the business may be facing some challenges, despite the revenue growth.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️