Synaptics Incorporated — Form 10-Q Summary
Business context and reporting period
Synaptics develops and sells semiconductor solutions for human-interface applications, including touch, display-driver, and fingerprint products used primarily in smartphones, tablets, notebook computers, and other electronic devices. The company operates as one segment and outsources manufacturing. The filing covers the fiscal third quarter and nine months ended March 25, 2017, presented as March 31, 2017, with comparisons to the corresponding 2016 periods.
Key financial metrics
| Metric | Q3 FY2017 | Q3 FY2016 | 9M FY2017 | 9M FY2016 |
|---|---|---|---|---|
| Revenue | $444.2 million | $402.5 million | $1,291.7 million | $1,343.0 million |
| Gross margin | $134.7 million; 30.3% | $144.4 million; 35.9% | $396.8 million; 30.7% | $473.4 million; 35.2% |
| Operating income | $12.3 million | $21.1 million | $46.7 million | $100.2 million |
| Net income | $4.5 million | $20.5 million | $31.0 million | $79.3 million |
| Diluted EPS | $0.13 | $0.54 | $0.87 | $2.09 |
| Operating cash flow | Not separately provided | Not separately provided | $104.5 million | $143.4 million |
- Q3 mobile revenue was $391.0 million, up 10.4%; PC revenue was $53.2 million, up 10.1%.
- Q3 unit volume increased 20.4%, while mobile average selling prices declined 9.6%. For nine months, mobile average selling prices declined 12.7% despite a 9.3% unit increase.
- Operating expenses were $122.4 million in Q3 and $350.1 million for nine months. Nine-month share-based compensation expense was $46.3 million.
- Cash and cash equivalents were $329.1 million at March 31, 2017, including $237.0 million held by foreign subsidiaries.
- Total debt was approximately $223.8 million under the credit agreement, including current and long-term portions. The company was in compliance with its debt covenants.
- Inventory was $157.0 million, accounts receivable were $246.6 million, and total current liabilities were $348.5 million.
Material changes versus the prior comparable period
- Q3 revenue increased 10.4%, but nine-month revenue decreased 3.8%, driven primarily by lower mobile average selling prices.
- Gross margin declined 560 basis points in Q3 and 450 basis points for nine months, primarily because of product mix and lower-margin TDDI products. The nine-month period was also affected by the ramp of new fingerprint products.
- Q3 net income fell 78.0%, and nine-month net income fell 60.9%. Profitability was pressured by lower gross margin, a $10.0 million litigation settlement charge, restructuring costs, and a higher Q3 tax provision.
- Research and development expense declined 3.1% in Q3 and 6.2% for nine months; selling, general, and administrative expense declined 12.6% and 15.9%, respectively, reflecting cost reductions, lower legal and foreign-currency expenses, and restructuring actions.
- Operating cash flow declined $38.9 million year over year to $104.5 million, while cash declined $23.1 million from June 30, 2016.
- The company repurchased $88.0 million of common stock, or 1.62 million shares, during the first nine months. Remaining repurchase authorization was $169.7 million at March 31, 2017.
Outlook, commentary, risks, and unusual items
- Management stated that future TDDI generations and new fingerprint products are expected to achieve margins more consistent with corporate averages once manufacturing and product ramps mature. No specific revenue or earnings guidance is provided in the filing.
- Management expected existing cash, operating cash flow, and available revolving credit capacity to meet working-capital, debt-service, acquisition-related, and other requirements for at least the next twelve months.
- On April 6, 2017, after quarter-end, the company increased total revolving credit commitments to $450 million and amended leverage-covenant provisions.
- In April 2017, Synaptics agreed to settle litigation with Amkor Technology on undisclosed terms involving intellectual-property licenses, assignments, and cash payments. A $10.0 million litigation settlement charge was recorded in the reported periods.
- Acquisition-related liabilities included $8.7 million retained in connection with the Validity dispute and approximately $5.8 million retained under the RSP acquisition indemnification holdback for the IIX dispute.
- The company retained $1.5 million of auction-rate securities that were below investment grade, had no maturity date, and could be difficult to liquidate without loss of principal.
- Key risks include semiconductor and mobile-device demand, pricing pressure, product mix, dependence on major customers and limited suppliers, intellectual-property claims, foreign exchange, variable-rate debt, inventory obligations, tax examinations, and the concentration of cash at foreign subsidiaries.
- Unrecognized tax benefits were $14.5 million at March 31, 2017; the IRS was examining fiscal years 2014 and 2015, and the liability could increase by up to $1.0 million over the following twelve months.
- Disclosure controls and procedures were assessed as effective, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether TDDI and fingerprint product ramps achieve the expected margin improvement and whether pricing pressure continues.
- The effect of the Amkor settlement and the eventual resolution of the IIX and Validity-related liabilities.
- Debt repayment requirements, covenant headroom, variable interest-rate exposure, and the impact of the expanded revolving facility.
- The sustainability of cash generation after stock repurchases, capital expenditures, direct-financing-lease investments, and acquisition-related payments.
- Customer concentration, particularly the disclosed major-customer revenue and receivables percentages.
- The accessibility and tax cost of the $237.0 million of cash held by foreign subsidiaries.
- The recoverability and liquidity of the remaining auction-rate securities and potential inventory or purchase-commitment losses.