Synaptics Incorporated — Form 10-Q Summary
Business context and reporting period
Synaptics develops semiconductor solutions for touch, display-driver, fingerprint-authentication and other human-interface applications used primarily in mobile devices, PCs and selected automotive and electronic products. The filing covers the 13-week quarter and 26-week year-to-date periods ended December 24, 2016, presented in the financial statements using December 31 calendar-quarter dates. Results are unaudited.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Six months ended Dec. 31, 2016 | Six months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Net revenue | $461.3 million | $470.5 million | $847.5 million | $940.5 million |
| Gross margin | $138.7 million; 30.1% | $165.2 million; 35.1% | $262.1 million; 30.9% | $329.0 million; 35.0% |
| Operating income | $28.8 million; 6.2% | $45.3 million; 9.6% | $34.4 million; 4.1% | $79.1 million; 8.4% |
| Net income | $22.8 million | $35.0 million | $26.5 million | $58.8 million |
| Diluted EPS | $0.64 | $0.93 | $0.74 | $1.55 |
| Operating cash flow | Not separately provided | Not separately provided | $52.4 million | $106.8 million |
Mobile applications generated $397.5 million, or 86.2%, of quarterly revenue; PC applications generated $63.8 million, or 13.8%. Year-to-date mobile revenue was $728.8 million and PC revenue was $118.7 million.
Cash and cash equivalents were $347.2 million at December 31, 2016, compared with $352.2 million at June 30, 2016. Total debt was $227.5 million outstanding under the credit agreement, consisting of a term loan and revolving borrowings; the balance-sheet carrying amounts were $15.0 million current and $209.7 million long term. The company had a $250 million revolving facility and was in compliance with its debt covenants.
Year-to-date investing cash use was $28.6 million, including $20.3 million for property and equipment and $15.8 million for a direct financing lease. Financing cash use was $26.9 million, including $25.0 million for share repurchases and $11.3 million of debt payments, partly offset by $13.1 million of share-issuance proceeds.
Material changes versus the prior comparable period
- Quarterly revenue declined 2.0%; year-to-date revenue declined 9.9%. Management attributed the decline primarily to lower average selling prices, partly offset by higher unit volumes.
- Mobile revenue declined 2.5% in the quarter and 11.1% year to date. PC revenue increased 1.8% in the quarter but declined 1.6% year to date.
- Gross margin declined 500 basis points in the quarter and 410 basis points year to date, primarily due to product mix, lower-margin TDDI products and costs associated with ramping new fingerprint products.
- Operating income fell 36.4% in the quarter and 56.5% year to date. Net income fell 34.9% in the quarter and 54.9% year to date.
- Research and development and selling, general and administrative expenses declined, reflecting headcount reductions and lower personnel, services and legal costs. These savings were more than offset by lower revenue and gross margin.
- Restructuring costs increased to $7.0 million year to date from $1.9 million in the prior period. The June 2016 restructuring plan had estimated total charges of $13.9 million, primarily for severance and facility consolidation.
- Operating cash flow declined to $52.4 million from $106.8 million, primarily reflecting lower earnings and unfavorable working-capital changes, including higher inventory and prepaid expenses.
- Share repurchases were $25.0 million, compared with $125.0 million in the prior-year period. The remaining repurchase authorization was $232.7 million at December 31, 2016.
Outlook, commentary, risks and unusual items
Management stated that existing cash, expected operating cash flow and available revolving-credit capacity should be sufficient for working capital, capital expenditures, debt service and other obligations for at least the next 12 months. The filing does not provide specific revenue, earnings or margin guidance.
- Key operating risks include pressure from lower average selling prices, product mix, short product life cycles, new-product ramp costs and dependence on customer design wins.
- The company outsources manufacturing and relies on contract manufacturers, semiconductor foundries and, in some cases, single or limited sources for key components. Purchase obligations for inventory totaled $35.9 million.
- Customer and geographic concentration is significant. China represented $229.0 million of quarterly revenue, and five customers each represented at least 10% of quarterly revenue, with the largest representing 21%.
- Failed auction-rate securities had a fair value of $1.5 million, no maturity date and below-investment-grade status. The securities are illiquid and could require a loss of principal if the company needed to access the funds.
- Acquisition-related liabilities included $8.7 million retained in connection with the Amkor Technology litigation involving Validity and approximately $5.5 million retained pending resolution of an IIX dispute related to the Renesas acquisition.
- The company faces potential intellectual-property infringement claims and related indemnification obligations. The filing states that potential maximum payments under certain indemnifications cannot be estimated.
- Unrecognized tax benefits totaled $14.1 million, and the company indicated that the liability could increase by up to $1.0 million within the next 12 months.
- Approximately $221.1 million of cash was held by foreign subsidiaries and may incur taxes if repatriated to the United States.
- New accounting standards involving revenue recognition, leases, financial instruments, stock compensation, inventory and cash-flow classification were not yet effective; the company was evaluating their impact.
Important facts for investors to verify
- Whether gross-margin pressure from TDDI and fingerprint-product ramps persists or reverses as product mix and volumes change.
- The sustainability of revenue and cash flow given lower average selling prices, mobile-market exposure and customer concentration.
- Debt maturity and covenant headroom, including the $90.0 million final term-loan payment due September 30, 2019 and the revolving facility maturity on the same date.
- Resolution and ultimate cash cost of the Amkor and IIX legal disputes and the related acquisition-liability reserves.
- The remaining restructuring charges and whether projected cost savings are achieved without impairing product development.
- Liquidity and recoverability of the remaining auction-rate securities and the tax consequences of repatriating foreign cash.
- The effect of pending accounting standards, particularly the new revenue-recognition standard, on reported revenue and profitability.