Synaptics Incorporated Fiscal 2020 Third-Quarter 10-Q Summary
Business Context and Reporting Period
Synaptics develops and sells semiconductor solutions for human-interface applications in mobile, personal-computing, Internet of Things, automotive, and other electronic devices. The filing covers the 13 and 39 weeks ended March 28, 2020, presented using March 31 calendar-quarter dates, and was filed May 7, 2020. The filing-period label in the request states “2019 Q3,” but the filing is for fiscal 2020 third quarter.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Nine Months Ended March 31, 2020 | Nine Months Ended March 31, 2019 |
|---|---|---|---|---|
| Net revenue | $328.1 million | $334.0 million | $1,056.3 million | $1,177.1 million |
| Gross margin | $135.6 million; 41.3% | $116.0 million; 34.7% | $421.1 million; 39.9% | $406.7 million; 34.6% |
| Operating income | $19.0 million; 5.8% | $(3.8) million; (1.1%) | $56.7 million; 5.4% | $27.0 million; 2.3% |
| Net income | $5.0 million | $6.7 million | $28.8 million | $23.3 million |
| Diluted earnings per share | $0.14 | $0.19 | $0.83 | $0.66 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $168.3 million | $110.8 million |
- Quarterly revenue declined 1.8%; nine-month revenue declined 10.3%.
- Quarterly gross margin expanded 660 basis points, primarily from favorable product mix, product-cost reductions, and lower amortization of fully amortized acquired intangibles.
- Quarterly net income decreased despite the operating-income improvement, mainly because the prior-year quarter included a $15.3 million income-tax benefit versus a $10.2 million tax provision in 2020.
- Cash and cash equivalents were $472.1 million at March 31, 2020, compared with $327.8 million at June 30, 2019.
- Convertible notes had a net carrying value of $482.0 million. The notes have a $525 million principal amount, bear 0.50% interest, and mature June 15, 2022.
- No borrowings were outstanding under the $200 million revolving credit facility at March 31, 2020; the Company borrowed $100 million in April 2020.
- Total current assets were $832.9 million versus current liabilities of $239.2 million. Total stockholders’ equity was $712.9 million.
Material Changes Versus the Prior Comparable Period
- Mobile revenue fell 13.7% in the quarter and 22.0% for the nine months, reflecting lower unit volumes and slightly lower average selling prices.
- PC revenue increased 19.2% in the quarter and 14.9% for the nine months; IoT revenue increased 15.1% and 5.4%, respectively.
- Research and development expense declined 8.2% in the quarter and 7.0% for the nine months; selling, general, and administrative expense declined 7.6% and 12.5%, respectively.
- Restructuring costs increased to $6.3 million in the quarter and $26.2 million for the nine months, versus none and $10.4 million, respectively, in the prior comparable periods.
- Inventory declined to $95.5 million from $158.7 million at June 30, 2019, partly because $12.5 million was reclassified to assets held for sale.
- The Company repurchased 813,082 shares for $30.1 million during the nine months. Remaining repurchase authorization was $177.5 million at March 31, 2020.
- In December 2019, Synaptics agreed to sell its LCD mobile TDDI product line. The transaction closed in April 2020 for $120.0 million in cash plus preliminary inventory consideration of $19.4 million.
- The Company adopted ASC 842 leases at the beginning of fiscal 2020, increasing reported assets by $27.8 million and liabilities by $28.4 million, without a significant income-statement or cash-flow effect.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide a clear quantitative revenue or earnings outlook.
- Management expected COVID-19 to adversely affect near-term operations and results but stated that the full impact could not be estimated because of uncertainty regarding duration, containment measures, customer demand, suppliers, and the global economy.
- Management believed cash, expected operating cash flow, and available revolving-credit capacity would be sufficient for working-capital needs, debt service, and other requirements for at least the next 12 months. The April 2020 $100 million borrowing was undertaken to preserve financial flexibility during COVID-19-related market uncertainty.
- Key exposures include dependence on mobile demand, customer and geographic concentration, semiconductor supply-chain disruptions, reliance on certain limited-source suppliers, product-quality and warranty claims, intellectual-property litigation, foreign exchange, and COVID-19-related operational and liquidity risks.
- Restructuring activities were expected to be completed by the end of fiscal 2020. The March 2020 TDDI-related restructuring accrual was $2.3 million, and the November 2019 restructuring liability was $6.2 million at March 31, 2020.
- The Company acquired a high-speed connectivity technology startup in August 2019, paying $2.5 million in cash and recording $3.7 million of in-process research and development expense. Up to $6.5 million of contingent consideration may become payable upon achievement of milestones.
- The Company was in compliance with its credit-facility covenants at quarter-end. The amended facility permits a consolidated leverage ratio of up to 4.75:1.00, subject to specified acquisition-related provisions, and requires interest coverage of at least 3.50:1.00.
- Gross unrecognized tax benefits were $21.1 million, with a possible increase of up to $2.5 million during the following 12 months. The filing states that ordinary-course litigation and claims were not expected to have a material adverse effect, but intellectual-property claims could involve significant costs.
Important Facts for Investors to Verify
- Assess subsequent-quarter revenue and margin effects from COVID-19, especially across mobile, PC, and IoT applications.
- Confirm the April 2020 TDDI divestiture proceeds, inventory consideration, post-closing adjustments, and any resulting gain or loss.
- Monitor the $525 million convertible notes due June 2022, including refinancing, redemption, conversion, and liquidity requirements.
- Evaluate whether restructuring savings offset severance, retention-program, and other transition costs.
- Review customer and geographic concentration, particularly exposure to China, Japan, and major customers.
- Track utilization of the $200 million revolving facility, covenant compliance, and the effect of COVID-19 on liquidity.
- Reconcile reported GAAP earnings with cash generation, including substantial non-cash amortization, share-based compensation, and convertible-debt discount amortization.