Business Context and Reporting Period
Synaptics Incorporated develops and sells human-interface semiconductor solutions, including touch, display-driver, fingerprint, voice, speech and video technologies, for mobile, PC and Internet of Things applications. This unaudited Form 10-Q covers the 13-week quarter ended September 29, 2018, presented in the financial statements as September 30, 2018, compared with a 14-week quarter ended September 30, 2017. Synaptics operates as one reportable segment and outsources manufacturing.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $417.6 million | $417.4 million |
| Gross profit / margin | $140.9 million / 33.7% | $114.4 million / 27.4% |
| Operating income/(loss) | $5.8 million | $(16.9) million |
| Net income/(loss) | $3.8 million | $(26.5) million |
| Diluted EPS | $0.11 | $(0.79) |
| Operating cash flow | $4.6 million | $39.8 million |
| Capital expenditures | $6.8 million | $11.4 million |
- Revenue mix was mobile $262.7 million, PC $68.6 million and IoT $86.3 million.
- Gross margin was 33.7%; operating margin was 1.4%; net margin was 0.9%.
- Cash and cash equivalents were $263.3 million at September 30, 2018, down from $301.0 million at June 30, 2018.
- Accounts receivable increased to $332.6 million and inventories increased to $161.2 million from $289.1 million and $131.2 million, respectively, at June 30, 2018.
- Convertible notes had a carrying value of $455.1 million and $525 million of original principal, bearing 0.50% interest and maturing in 2022. The company had no borrowings under its $200 million revolving credit facility and was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat, but composition shifted materially: mobile revenue declined 10.3%, while PC increased 5.1% and IoT increased 45.8%.
- Mobile unit volume declined 24.7%, partly offset by a 19.1% increase in average selling price. IoT units increased 37.9% and average selling price increased 5.7%; PC units declined 8.8% while average selling price increased 15.2%.
- Gross margin increased 630 basis points, primarily from favorable product mix and the absence of $15.7 million of acquisition-related inventory fair-value adjustments recorded in the prior-year quarter.
- Operating results improved by $22.7 million, despite $8.3 million of restructuring costs, due to higher gross profit, lower selling, general and administrative expense, and lower acquired-intangibles amortization.
- Research and development expense increased 3.3% to $90.0 million, while selling, general and administrative expense decreased 15.9% to $33.9 million.
- Net cash from operations declined $35.2 million, primarily because accounts receivable, inventories and prepaid assets increased substantially. Days sales outstanding increased to 72 days from 67 days at June 30, 2018, and annual inventory turns declined to six from seven.
- Financing cash use was $38.2 million, principally reflecting $39.4 million of repurchases of 862,454 shares. The prior-year period included $514.5 million of convertible-debt proceeds, $220.0 million of debt repayment and $93.6 million of share repurchases.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide a clear quantitative revenue or earnings outlook for the next quarter or full fiscal year.
- Management expects additional restructuring costs of approximately $0.9 million to $1.9 million in the second quarter of fiscal 2019. The fiscal 2019 mobile fingerprint optical restructuring was estimated at $9.0 million to $10.0 million and is expected to be substantially complete by the end of that quarter.
- Management believes cash, anticipated operating cash flow and available revolver capacity will fund working-capital needs and debt service for at least the next 12 months.
- The company adopted ASC 606 revenue recognition on July 1, 2018 using the modified retrospective method. Revenue recognition was substantially unchanged, but $4.8 million of customer incentives were reclassified from accounts receivable to accrued liabilities.
- Unusual or nonrecurring items included a $2.8 million recovery on investments, a $1.6 million reversal of a payroll-tax penalty accrual, $8.3 million of restructuring costs and a $1.9 million reduction of the Validity acquisition earnout liability following settlement of an indemnification claim.
- The company recorded a provisional $11.6 million liability related to the Tax Cuts and Jobs Act transition tax, but tax calculations remain subject to finalization. Gross unrecognized tax benefits were $23.8 million, with a possible increase of up to $4.3 million within the next 12 months.
- Key risks include mobile-market weakness, customer and geographic concentration, reliance on limited suppliers and contract manufacturers, inventory purchase commitments, intellectual-property claims, product demand volatility, foreign-exchange exposure, convertible-debt obligations and execution of restructuring activities. The filing states that there were no material changes to the risk factors in the prior Form 10-K.
- Of total cash and cash equivalents, $168.8 million was held by foreign subsidiaries and may incur state or foreign taxes if repatriated.
Important Facts for Investors to Verify
- Whether the shift from mobile toward IoT and PC products is sustainable and whether it supports the reported gross-margin improvement.
- Progress on mobile fingerprint restructuring, including final costs and expected savings.
- Collection of elevated accounts receivable, inventory normalization and the decline in operating cash flow.
- Final resolution of the Tax Cuts and Jobs Act transition-tax calculations and other uncertain tax positions.
- Liquidity and refinancing plans for the $525 million convertible notes due in 2022, including potential cash settlement upon conversion or redemption.
- Remaining share-repurchase authorization of approximately $186.7 million and its effect on cash balances and share count.
- Potential impact of customer concentration, supplier constraints, intellectual-property litigation and the $60.8 million of purchase obligations and other commitments.