Synaptics Incorporated — Form 10-Q Summary
Business Context and Reporting Period
Synaptics develops and sells custom capacitive human-interface solutions for mobile computing, communications, entertainment, and other electronic devices. The filing covers fiscal 2011 second-quarter and year-to-date results. The operating quarter comprised 13 weeks ended December 25, 2010, although financial statement captions generally use December 31, 2010. The report was filed January 28, 2011.
The company operates as one segment and generates revenue from PC applications and digital lifestyle products, including mobile smartphones. Manufacturing is outsourced, with no long-term supply contracts with contract manufacturers.
Financial Highlights
| Metric | Three months ended Dec. 31, 2010 | Three months ended Dec. 31, 2009 | Six months ended Dec. 31, 2010 | Six months ended Dec. 31, 2009 |
|---|---|---|---|---|
| Net revenue | $159.6 million | $133.3 million | $312.8 million | $252.9 million |
| Gross margin | $65.0 million; 40.8% | $53.8 million; 40.4% | $127.9 million; 40.9% | $102.2 million; 40.4% |
| Operating income | $19.4 million; 12.2% | $14.8 million; 11.1% | $41.8 million; 13.4% | $29.4 million; 11.6% |
| Net income | $17.7 million; 11.1% | $12.2 million; 9.2% | $36.4 million; 11.6% | $22.0 million; 8.7% |
| Diluted EPS | $0.50 | $0.35 | $1.02 | $0.62 |
- Quarterly revenue increased 19.7%; year-to-date revenue increased 23.7%.
- Quarterly digital lifestyle revenue increased 48.4% to $88.6 million, including $87.5 million from mobile smartphones. PC revenue declined 3.6% to $71.0 million.
- Year-to-date digital lifestyle revenue increased 55.6% to $162.9 million, while PC revenue increased 1.1% to $149.9 million.
- Total unit shipments increased approximately 7% in the quarter and 15% year to date, supported by higher digital lifestyle and PC market penetration and slightly higher product mix.
- Research and development expense increased 18.7% in the quarter and 21.6% year to date, while selling, general and administrative expense increased 14.4% and 13.7%, respectively.
- The quarterly effective tax rate was 10.1%, compared with 13.2% in the prior-year quarter; the year-to-date rate was 13.9%, compared with 18.8%.
Cash Flow, Liquidity, Debt and Capital Allocation
| Metric | Dec. 31, 2010 | June 30, 2010 |
|---|---|---|
| Cash and cash equivalents | $216.4 million | $209.9 million |
| Accounts receivable | $125.6 million | $101.5 million |
| Inventory | $23.0 million | $18.7 million |
| Current liabilities | $119.3 million | $106.0 million |
| Notes payable | $2.3 million | $2.3 million |
- Six-month operating cash flow was $43.5 million, compared with $55.6 million in the prior-year period.
- Investing cash flow was an outflow of $6.7 million, principally reflecting $6.9 million of capital expenditures.
- Financing cash flow was an outflow of $30.2 million, including $40.2 million for share repurchases and $11.6 million of proceeds from stock issuance under equity plans.
- Days sales outstanding increased from 63 to 71 days, and inventory turns declined from 19 to 16, from June 30 to December 31, 2010.
- The company had a $40.0 million unsecured revolving credit facility, with no borrowings outstanding. Management stated that cash and anticipated operating cash flow should satisfy requirements for at least the next 12 months.
- The company repurchased 1.45 million shares for approximately $40.2 million during the six months. The repurchase authorization had $97.9 million remaining and expires in April 2012.
- Only $2.3 million of the original $125 million convertible senior subordinated notes remained outstanding; the notes mature in 2024.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by digital lifestyle and smartphone demand, which shifted the mix away from PCs. Digital lifestyle products represented 55.5% of quarterly revenue versus 44.8% previously.
- Gross margin improved modestly by 0.4 percentage points for the quarter and 0.5 percentage points year to date.
- Operating margin improved by 1.1 percentage points for the quarter and 1.8 percentage points year to date, despite higher absolute research and development and SG&A spending.
- Net income increased 44.6% for the quarter and 65.1% year to date. Interest expense fell sharply because most convertible notes had been retired in fiscal 2010.
- Quarterly SG&A included approximately $2.7 million of non-recurring costs related to the resignation of the former CEO.
- Share-based compensation expense declined to $9.5 million for the quarter and $17.4 million year to date, partly because of a cumulative error adjustment recorded in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management cited calendar-year 2011 industry estimates of approximately 15% notebook-market growth and 22% mobile-smartphone-market growth. The filing does not provide formal company revenue or earnings guidance.
- Key risks include economic conditions, customer product success, design-to-production execution, competition, intellectual-property claims, warranty obligations, technology acceptance, dependence on key markets and customers, lengthy development cycles, and the absence of long-term purchase or supply commitments.
- Non-current auction-rate securities had a fair value of $28.5 million versus a $40.5 million par value. The securities remained illiquid because auctions had failed since 2007, and fair value depended on Level 3 valuation assumptions. Management stated it had the intent and ability to hold them until recovery or maturity.
- Gross unrecognized tax benefits increased to $20.6 million, with accrued interest and penalties of $1.5 million. The timing of potential settlement could not be reliably estimated, and future tax-rate adjustments may be material.
- Potential third-party intellectual-property claims could result in litigation costs, damages, and diversion of resources. No legal proceedings were reported in Part II, Item 1.
- Total contractual obligations were approximately $26 million, including $3 million related to the remaining notes, $6 million of leases, and $17 million of purchase obligations and other commitments.
- No material recognizable subsequent events were identified through the filing date.
Most Important Facts for Investors to Verify
- Confirm the period-end convention: the quarter ended December 25, 2010, while the financial statements use December 31 captions.
- Assess whether smartphone and digital lifestyle growth can offset PC weakness and sustain the reported revenue mix shift.
- Monitor accounts receivable growth, days sales outstanding, inventory turns, and operating cash conversion.
- Evaluate the liquidity and valuation risk associated with the $28.5 million of illiquid auction-rate securities.
- Review the impact of the former CEO’s approximately $2.7 million non-recurring costs and any related leadership transition effects.
- Consider effective-tax-rate volatility arising from foreign income, research credits, share-based compensation, and uncertain tax positions.
- Assess customer and geographic concentration, including substantial revenue exposure to China and major contract manufacturers and OEMs.
- Verify future share repurchases, dilution from equity awards, and the remaining $97.9 million authorization.