Synaptics Incorporated: Fiscal 2022 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Synaptics develops and sells semiconductor solutions for Internet of Things (IoT), personal computing (PC), and Mobile applications. The filing covers the 13-week and 26-week periods ended December 25, 2021, compared with December 26, 2020. The fiscal quarter was filed on February 3, 2022.
Revenue is generated primarily from ASIC chips sold to OEMs and contract manufacturers. The company uses outsourced manufacturing and relies on third-party suppliers, including limited or single sources for certain components.
Key Financial Metrics
| Metric | Three Months Ended December 25, 2021 | Prior Year | Six Months Ended December 25, 2021 | Prior Year |
|---|---|---|---|---|
| Net revenue | $420.5 million | $357.6 million | $793.2 million | $686.0 million |
| Gross profit | $225.1 million | $150.4 million | $423.2 million | $284.9 million |
| Gross margin | 53.5% | 42.1% | 53.4% | 41.5% |
| Operating income | $77.6 million | $58.5 million | $138.2 million | $64.5 million |
| Operating margin | 18.5% | 16.4% | 17.4% | 9.4% |
| Net income | $69.5 million | $49.6 million | $109.7 million | $46.8 million |
| Diluted EPS | $1.71 | $1.36 | $2.70 | $1.29 |
| Operating cash flow | Not separately provided | Not separately provided | $180.7 million | $77.9 million |
Six-month revenue increased 15.6%, while net income increased 134.4%. Six-month diluted EPS increased 109.3%. The filing does not provide a separate quarterly cash-flow statement.
- Revenue mix: Six-month IoT revenue was $467.2 million, up 64.7%; PC revenue was $171.3 million, down 0.4%; Mobile revenue was $154.7 million, down 32.8%.
- Gross margin: Expansion reflected favorable product mix, higher average selling prices, and lower inventory fair-value adjustments of $17.6 million for the six-month period.
- Operating expenses: Six-month research and development expense was $175.0 million, up 10.6%; selling, general and administrative expense was $85.9 million, up 14.8%; restructuring costs were $6.5 million.
- Cash and liquidity: Cash and cash equivalents were $502.8 million at December 25, 2021, compared with $836.3 million at June 26, 2021. Short-term investments were $71.1 million.
- Working capital: Accounts receivable increased to $312.2 million and inventories increased to $133.3 million from $228.3 million and $82.0 million, respectively, at fiscal year-end. Days sales outstanding increased from 63 to 67 days, and annual inventory turns declined from seven to six.
- Debt: Carrying-value debt consisted of approximately $400.0 million of 4.0% senior notes due 2029 and $600.0 million of term debt due 2028, net of issuance costs. The $250.0 million revolving credit facility had no outstanding balance.
- Leverage compliance: The company reported compliance with its revolving credit facility covenants as of December 25, 2021.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by IoT applications, including higher unit volume and average selling prices. PC revenue declined because of customer supply-chain constraints, while Mobile revenue declined due to lower unit volumes and customer weakness.
- Gross margin increased 1,140 basis points in the quarter and 1,190 basis points year to date, primarily from product mix, pricing, and lower inventory fair-value adjustments.
- Research and development and selling, general and administrative expenses increased, including higher share-based compensation associated with the company’s increased stock price and additional DSP Group personnel.
- Synaptics completed the DSP Group acquisition on December 2, 2021, for purchase consideration of $550.9 million. The acquisition contributed $11.3 million of revenue and a $16.4 million net loss from the closing date through December 25, 2021. The purchase-price allocation remains preliminary and included $256.6 million of goodwill and $200.5 million of acquired intangible assets.
- The company financed the acquisition with cash and a new $600.0 million term loan. It also redeemed its convertible notes for $505.6 million in cash and approximately 3.5 million treasury shares, recognizing an $8.1 million loss.
- Restructuring costs increased to $5.1 million in the quarter, primarily for DSP Group integration synergies and operational efficiencies. The related activities are expected to be completed by the end of fiscal 2022.
- Prior-year revenue was reclassified to move virtual-reality revenue from Mobile applications to IoT applications; the filing cites $7.9 million for the quarter and approximately $14.1 million for the six-month period.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a clear numerical revenue, earnings, or margin guidance forecast. Management stated that existing cash, expected operating cash flow, financing sources, and available revolving-credit capacity should be sufficient for working capital, acquisitions, debt service, and other cash requirements for at least the next 12 months.
- Management remained optimistic that the most significant COVID-19 impact had passed, but warned that new variants could cause renewed disruption.
- Global semiconductor supply constraints, component shortages, manufacturing capacity, supplier yields, and delivery schedules remain material operating risks. The company entered into long-term capacity and pricing agreements with some suppliers.
- Customer concentration and market exposure remain significant. Three customers each represented at least 10% of revenue in certain periods, and major customers represented substantial portions of accounts receivable.
- The company expects to sell specified San Jose properties for $58.0 million in a sale-and-leaseback transaction, subject to customary closing conditions. The transaction was expected to close in February 2022; the related $50.8 million net book value was classified as held for sale at December 25, 2021.
- Purchase obligations and other commitments totaled $184.4 million. Total contractual obligations, including debt principal and interest, leases, purchase commitments, and transition tax payable, were $1.362 billion.
- Unrecognized tax benefits totaled $31.6 million, with $2.4 million of accrued interest and penalties. The company could not reliably estimate the timing of potential cash settlement.
- The company is exposed to intellectual-property infringement claims, litigation costs, customer demand volatility, cyclicality, foreign-exchange risk, and risks associated with acquisitions and integration.
- The filing states that there were no material changes to previously disclosed risk factors and that disclosure controls were effective. DSP Group was excluded from the internal-control assessment during its first year of integration.
Investor Verification Checklist
- Verify the post-acquisition contribution, integration costs, synergies, and final purchase-price allocation for DSP Group.
- Monitor IoT growth against continued weakness in Mobile and supply-chain constraints affecting PC customers.
- Reconcile reported gross-margin expansion with inventory fair-value adjustments, product mix, pricing, and acquired-intangible amortization.
- Assess debt-service capacity, variable-rate exposure on the $600.0 million term loan, covenant headroom, and future mandatory prepayments.
- Track cash conversion, accounts-receivable days, inventory turns, and purchase obligations.
- Confirm completion and proceeds of the San Jose sale-and-leaseback transaction and the resulting lease commitments.
- Evaluate customer concentration, supplier concentration, semiconductor capacity availability, and potential intellectual-property claims.
- Review tax exposures, including the $31.6 million of unrecognized tax benefits and the timing of possible settlements.