Business Context and Reporting Period
Synaptics Incorporated develops and sells human-interface solutions for mobile computing, communications, entertainment, and other electronic devices. The company operates in one segment, with revenue from mobile product applications and personal-computer applications. This unaudited Form 10-Q covers the fiscal third quarter and nine months ended March 30, 2013; financial statement captions are presented as March 31, 2013. Fiscal 2013 ends June 29, 2013.
Key Financial Metrics
| Metric | Three months ended March 31, 2013 | Three months ended March 31, 2012 | Nine months ended March 31, 2013 | Nine months ended March 31, 2012 |
|---|---|---|---|---|
| Net revenue | $163.3 million | $131.7 million | $433.4 million | $410.6 million |
| Gross margin | $81.1 million; 49.6% | $62.2 million; 47.2% | $210.7 million; 48.6% | $192.2 million; 46.8% |
| Operating income | $23.7 million; 14.5% | $14.7 million; 11.2% | $46.9 million; 10.8% | $52.2 million; 12.7% |
| Net income | $36.4 million | $11.4 million | $53.6 million | $41.8 million |
| Diluted EPS | $1.07 | $0.33 | $1.58 | $1.22 |
- Mobile revenue was $104.7 million in the quarter, or 64.1% of revenue, compared with 50.6% in the prior-year quarter. PC revenue was $58.7 million, or 35.9%, compared with 49.4%.
- Research and development expense increased 24.9% year over year to $36.7 million for the quarter and 18.7% to $103.8 million for the nine-month period. Selling, general, and administrative expense increased 11.9% to $20.2 million for the quarter and 10.7% to $58.1 million for the nine-month period.
- Cash and cash equivalents were $315.5 million at March 31, 2013, compared with $305.0 million at June 30, 2012. Total current assets were $471.0 million and current liabilities were $127.0 million.
- Non-current investments included $15.8 million of auction-rate securities that had failed to settle in auctions and were not liquid. The company also held $278.0 million of cash and cash equivalents at foreign subsidiaries.
- Notes payable totaled $2.3 million. The company had no borrowings under its $50.0 million Wells Fargo working-capital line of credit, which expires September 1, 2013.
- Operating cash flow for the nine months was $69.6 million, compared with $79.7 million in the prior-year period. Investing activities used $32.8 million, including $30.0 million for property and equipment and $5.0 million for a business acquisition. Financing activities used $26.3 million, including $31.3 million for treasury-stock purchases.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 24.0%, driven by 57.2% growth in mobile applications, partially offset by a 9.9% decline in PC applications. Nine-month revenue increased 5.5%, with mobile revenue up 19.7% and PC revenue down 9.2%.
- Gross margin expanded 240 basis points in the quarter and 180 basis points for the nine months, primarily because of a favorable mix toward higher-margin mobile chip solutions.
- Quarterly operating income increased 60.6%, but nine-month operating income declined 10.2% because operating expenses grew faster than revenue, including higher research and development costs.
- Net income increased 218.4% in the quarter and 28.1% for the nine months. The increase was materially affected by a $12.6 million tax benefit in the quarter versus a $3.6 million tax provision in the prior-year quarter.
- The effective tax rate was negative 52.8% for the quarter and negative 12.8% for the nine-month period, primarily due to a $15.8 million benefit from remeasurement of a prior-year uncertain tax position and approximately $3.5 million from retroactive reinstatement of the federal research credit.
- Inventory increased to $43.9 million from $31.7 million at June 30, 2012. Management reported that inventory turns declined from 9 to 7, while days sales outstanding improved from 68 to 59 days.
- The company purchased 1,240,440 shares for $31.3 million during the nine months. At March 31, 2013, $74.8 million remained under the $520.0 million repurchase authorization, which expires in October 2013.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management cited continued growth in mobile markets and weakness in the PC market. Industry estimates referenced in the filing anticipated approximately 28% growth in mobile smartphone unit shipments and less than 1% growth in notebook shipments during calendar 2013.
- The filing does not provide a clear numerical revenue, earnings, or margin forecast for the next quarter or full fiscal year.
- Synaptics uses outsourced manufacturing and has no long-term supply contracts with its contract manufacturers. It relies on three wafer foundries, two packaging manufacturers, and, in some cases, single or limited sources for key components.
- In connection with the June 2012 Pacinian acquisition, the company paid $5.0 million of additional consideration and recorded an $8.0 million contingent-consideration liability. Up to $10.0 million of additional consideration may be payable based on ThinTouch product sales through June 2016.
- The company sold its existing headquarters in April 2013 for approximately $12.6 million. It expects to record an approximately $1.5 million gain in the June quarter and may incur up to $600,000 for abandonment of an adjacent leased building in the June or September quarter.
- Unrecognized tax benefits decreased to $8.3 million from $23.1 million at June 30, 2012. The tax case remained subject to Joint Committee of Taxation review, and future adjustments could cause material period-to-period tax-rate volatility.
- Key risks include customer and market concentration, rapid product cycles, dependence on customer design wins and product acceptance, competitive pressures, supplier constraints, inventory obligations, warranty claims, intellectual-property litigation, foreign operations, and the illiquidity and valuation uncertainty of auction-rate securities.
- Management stated that existing cash and anticipated operating cash flow should be sufficient for working-capital and other cash requirements for at least the next 12 months.
Important Facts for Investors to Verify
- Whether mobile-market growth and the shift toward higher-margin chip solutions offset continuing PC-market weakness.
- Whether the quarter’s unusually favorable tax benefit is nonrecurring and how future tax audits or Joint Committee review affect cash taxes and earnings.
- Inventory levels, inventory turns, customer obligations, and potential write-downs as product cycles and demand change.
- The timing and amount of remaining Pacinian contingent consideration and its effect on cash flow.
- The liquidity, recoverability, and valuation assumptions underlying the $15.8 million of failed auction-rate securities.
- The location and tax implications of the $278.0 million held by foreign subsidiaries.
- The effect of headquarters relocation costs, the expected property-sale gain, capital expenditures, and continued share repurchases on liquidity.
- Potential intellectual-property claims, warranty exposure, supplier concentration, and the absence of long-term manufacturing commitments.