Synaptics Incorporated: Fiscal 2014 Second-Quarter Form 10-Q Summary
Business context and reporting period
Synaptics develops and supplies custom human-interface solutions, including touch, sensing, and biometric fingerprint technologies, for mobile devices, PCs, and other electronics. The filing covers the 13-week fiscal quarter ended December 28, 2013, presented as December 31, 2013, and the six months ended December 31, 2013. Results include Validity Sensors from its November 7, 2013 acquisition.
Key financial metrics
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2013 | Six months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Net revenue | $205.8 million | $143.0 million | $428.4 million | $270.1 million |
| Gross profit | $94.5 million | $69.0 million | $203.8 million | $129.6 million |
| Gross margin | 45.9% | 48.3% | 47.6% | 48.0% |
| Operating income | $22.1 million | $14.9 million | $69.3 million | $23.3 million |
| Net income | $17.3 million | $11.1 million | $52.3 million | $17.2 million |
| Diluted EPS | $0.48 | $0.33 | $1.47 | $0.51 |
| Operating cash flow | Not separately provided | Not separately provided | $85.8 million | $44.9 million |
- Mobile product revenue was $133.6 million for the quarter, or 64.9% of revenue, up 63.8% year over year. PC product revenue was $72.2 million, up 17.4%.
- Six-month mobile revenue increased 102.6% to $296.3 million, while PC revenue increased 6.6% to $132.1 million.
- Quarterly operating margin was 10.7%, compared with 10.4% in the prior-year quarter; six-month operating margin was 16.2%, compared with 8.6%.
- Research and development expense increased 34.1% for the quarter, and selling, general, and administrative expense increased 20.2%, primarily due to additional personnel, infrastructure, acquisition-related costs, and higher business activity.
- Cash and cash equivalents were $369.4 million at December 31, 2013, compared with $355.3 million at June 30, 2013. Approximately $314.4 million was held by foreign subsidiaries.
- Six-month investing cash outflows were $36.8 million, including $19.6 million for acquisitions and $17.1 million for property and equipment. Financing cash outflows were $34.9 million, including $70.3 million of share repurchases, partly offset by $39.2 million of equity issuance proceeds.
- The company had $2.3 million of current notes payable and no borrowings under its $75.0 million Wells Fargo working-capital facility. The filing states that the remaining convertible notes were intended to be called within 12 months.
Material changes versus the prior comparable period
- Revenue increased 43.8% for the quarter and 58.6% for the six-month period, driven primarily by higher mobile unit sales, market-share gains, increased PC sales, and the Validity acquisition.
- Net income increased 56.0% for the quarter and 204.5% for the six-month period. The six-month comparison benefited from stronger revenue and operating leverage.
- Gross margin declined 240 basis points in the quarter and 40 basis points for the six-month period, primarily because of acquired-intangible amortization and an unfavorable product mix.
- Mobile products represented a larger share of revenue: 64.9% versus 57.0% for the quarter and 69.2% versus 54.1% for the six-month period.
- On November 7, 2013, Synaptics acquired Validity for total estimated consideration of $127.8 million, consisting of $20.0 million cash, $70.3 million of stock, and $37.5 million of contingent consideration. Validity contributed $4.3 million of revenue and approximately $2.5 million of operating loss after acquisition.
- Validity added $76.4 million of acquired intangible assets and $39.0 million of goodwill. Its contingent consideration liability was remeasured to $49.4 million at December 31, 2013.
- The company repurchased 1.7 million shares for $70.3 million during the six months. Remaining authorization under the repurchase program was $89.6 million.
Guidance, outlook, commentary, risks, and unusual items
- Management cited industry estimates that calendar-year 2014 smartphone unit shipments could increase approximately 20%, tablet shipments 22%, and notebook shipments decline approximately 7%; these are industry estimates, not company guidance.
- Management expects existing cash and operating cash flows to fund working capital and other requirements for at least the next 12 months, including Validity obligations and the purchase and renovation of additional San Jose buildings.
- The Validity earn-out may require up to $162.5 million of additional consideration through March 2016. The Pacinian earn-out may require up to $10.0 million through June 2016. Changes in fair value may cause earnings volatility.
- Synaptics held $18.3 million of auction-rate securities whose auctions had failed. These investments were illiquid, included $13.4 million of cumulative other-than-temporary impairment, and could require a loss of principal if accessed before maturity.
- Key risks include customer and market concentration, dependence on OEM product success, competitive pressures, long development and acceptance cycles, limited long-term supply commitments, reliance on certain suppliers, inventory and warranty exposure, intellectual-property claims, and risks associated with new technologies and acquisitions.
- The company had $9.2 million of gross unrecognized tax benefits, and tax examinations or the pending Joint Committee on Taxation review could cause future effective tax-rate volatility.
- Subsequent to quarter-end, Synaptics authorized redemption of all remaining 0.75% convertible senior subordinated notes, with a stated redemption date of April 2, 2014; holders could convert before March 31, 2014.
- On January 22, 2014, the company purchased an adjacent San Jose site for approximately $10.1 million in cash. The filing does not provide full-year revenue or earnings guidance.
Important facts for investors to verify
- Whether the substantial mobile-market growth and market-share gains continued after the quarter and offset expected notebook-market weakness.
- The final purchase-price allocation for Validity, the completion and commercialization timing of its in-process research and development, and the ultimate earn-out payments.
- The effect of acquired-intangible amortization, contingent-consideration remeasurement, and acquisition-related expenses on future margins and earnings.
- The timing and cash impact of convertible-note redemption or conversion, the San Jose property investment, and remaining share repurchases.
- The liquidity and eventual recovery of auction-rate securities, including potential changes in fair value.
- Future tax assessments, resolution of unrecognized tax benefits, and the impact of the research-credit expiration or extension on the effective tax rate.