Synaptics Incorporated — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 26, 2022, compared with the periods ended March 27, 2021. The filing was signed May 5, 2022. The filing represents fiscal 2022 Q3, although the request metadata refers to 2021 Q3.
Business Context
Synaptics develops and sells semiconductor solutions for Internet of Things, personal computing, and mobile applications. It operates as one reportable segment and uses a predominantly fabless manufacturing model, relying on third-party wafer, packaging, and contract manufacturing suppliers.
The company completed its $543.3 million acquisition of DSP Group on December 2, 2021, adding voice and wireless chipset solutions. DSP Group contributed approximately $44.6 million of revenue from closing through March 26, 2022.
Key Financial Metrics
| Metric | Three months ended March 26, 2022 | Three months ended March 27, 2021 | Nine months ended March 26, 2022 | Nine months ended March 27, 2021 |
|---|---|---|---|---|
| Revenue | $470.1 million | $325.8 million | $1,263.3 million | $1,011.8 million |
| Gross profit | $253.8 million | $155.5 million | $677.0 million | $440.4 million |
| Gross margin | 54.0% | 47.7% | 53.6% | 43.5% |
| Operating income | $88.1 million | $31.6 million | $226.3 million | $96.1 million |
| Operating margin | 18.7% | 9.7% | 17.9% | 9.5% |
| Net income | $64.9 million | $13.8 million | $174.6 million | $60.6 million |
| Diluted earnings per share | $1.59 | $0.35 | $4.29 | $1.62 |
| Operating cash flow | Not separately provided | Not separately provided | $308.4 million | $214.3 million |
- Third-quarter revenue increased 44.3%; nine-month revenue increased 24.9%.
- Third-quarter net income increased 370.3%; nine-month net income increased 188.1%.
- Gross margin expanded 630 basis points in the quarter and 1,010 basis points year to date, primarily from favorable product mix and higher average selling prices.
- Quarterly operating expenses were $165.7 million, including $11.3 million of restructuring costs and $12.0 million of acquired-intangible amortization.
- Share-based compensation expense was $34.1 million in the quarter and $106.3 million year to date.
Revenue Mix
| Product category | Q3 2022 | Q3 2021 | Change | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|---|
| IoT | $301.6 million | $151.4 million | +99.2% | $768.8 million | $435.0 million |
| PC | $90.1 million | $98.4 million | -8.4% | $261.4 million | $270.4 million |
| Mobile | $78.4 million | $76.0 million | +3.2% | $233.1 million | $306.4 million |
IoT represented 64.2% of quarterly revenue, compared with 46.5% in the prior-year quarter. PC revenue declined primarily because of lower unit volumes associated with customer supply-chain constraints. Mobile revenue increased in the quarter but declined year to date.
Liquidity, Cash Flow, and Capital Structure
- Cash and cash equivalents were $690.3 million at March 26, 2022, down from $836.3 million at June 26, 2021.
- Short-term investments were $64.6 million, resulting in cash and short-term investments of $754.9 million.
- Long-term debt was $982.6 million, consisting principally of $400.0 million of 4.0% senior notes due 2029 and a $600.0 million term loan due December 2028. The balance sheet reported no current convertible notes.
- Approximate reported net debt, calculated as long-term debt less cash and short-term investments, was $227.7 million.
- The $250.0 million revolving credit facility had no outstanding balance at March 26, 2022. The company remained in compliance with its debt covenants.
- Year-to-date operating cash flow was $308.4 million. Investing cash flow used $469.4 million, primarily for the DSP Group acquisition, while financing activities provided $16.9 million.
- Inventory increased to $145.9 million from $82.0 million at fiscal year-end, and annual inventory turns declined from eight to five. Accounts receivable increased to $298.3 million from $228.3 million.
- Management stated that available cash, expected operating cash flow, financing sources, and revolver availability should be sufficient for working capital, debt service, and other requirements for at least the next 12 months.
Material Changes Versus Prior Comparable Period
- Revenue growth was driven predominantly by IoT applications, higher average selling prices, favorable product mix, and DSP Group contributions.
- Gross margin and operating margin improved materially, notwithstanding higher acquired-intangible amortization and restructuring costs.
- Research and development expense increased 26.7% in the quarter and 15.9% year to date, reflecting higher compensation, share-based compensation, and DSP Group-related headcount.
- The company issued $600.0 million of incremental term debt to finance the DSP Group acquisition and redeemed its remaining convertible notes for $505.6 million in cash, delivering approximately 3.5 million treasury shares and recording an $8.1 million loss.
- The company completed a sale-and-leaseback transaction for San Jose properties, receiving $55.9 million and recognizing a $5.4 million gain. The initial lease term is 12 years, with a seven-year renewal option.
- No common shares were repurchased during the quarter. Remaining repurchase authorization was $577.4 million as of March 26, 2022.
- Restructuring costs for fiscal 2022 totaled $17.8 million year to date, including DSP Group synergy actions and accelerated equity vesting. The activities were expected to be completed by the end of fiscal 2022.
Guidance, Outlook, Commentary, and Risks
The filing does not provide a clear numerical revenue or earnings forecast. Management remained optimistic that the most significant COVID-19 impact had passed and expected vaccination programs to moderate disruption, while noting that new variants, lockdowns, and renewed restrictions could adversely affect operations.
- Global semiconductor supply constraints, capacity shortages, logistics issues, component availability, and supplier allocation remain significant operating risks. Synaptics entered into certain long-term capacity and pricing agreements and reported input-cost increases that it had generally passed through to customers without a material effect on reported results through the period.
- Competition for hardware and software engineers is constraining hiring and contributing to wage inflation.
- Revenue remains exposed to cyclicality and volatility in PC and mobile markets, dependence on large customers, and reliance on third-party manufacturers and a limited number of suppliers.
- Customer concentration is material: two customers each represented 14% of third-quarter revenue; one customer represented 13% and another 16% of prior-year nine-month revenue.
- Future income-tax expense may be adversely affected by new foreign tax credit regulations and research-and-development capitalization rules effective beginning in fiscal 2023. Gross unrecognized tax benefits were $37.0 million, excluding $2.7 million of accrued interest and penalties.
- The company is subject to potential intellectual-property infringement claims. It stated that the maximum potential payments under certain indemnifications cannot be estimated, although historical costs have not been significant.
- DSP Group was excluded from the company’s internal-control assessment during the permitted first year following acquisition while integration continued.
Most Important Facts to Verify
- Whether IoT growth and the DSP Group acquisition can offset continuing weakness in PC and mobile volumes.
- The sustainability of the 53% to 54% gross-margin range after acquisition-related amortization, supply-chain costs, and product-mix changes.
- Execution of the DSP Group integration and the remaining restructuring actions, including expected savings versus associated costs.
- Term-loan amortization, floating-rate exposure, future excess-cash-flow sweep requirements, and compliance with leverage and interest-coverage covenants.
- Inventory levels, inventory turns, customer receivables, and potential obligations to purchase inventory from contract manufacturers.
- Effects of semiconductor shortages, COVID-19 restrictions, supplier concentration, customer concentration, and engineering talent constraints.
- Future tax-rate changes associated with foreign tax credit and research-and-development capitalization rules.