Synaptics Incorporated — Form 10-Q Summary
Business Context and Reporting Period
Synaptics develops and sells semiconductor solutions for mobile, PC, IoT, automotive and other electronic devices, including touch, display-driver, fingerprint, voice, speech and video technologies. The filing covers the 13 and 26 weeks ended December 28, 2019, presented in the financial statements as December 31, 2019, and compares results with the corresponding periods in 2018. Fiscal 2020 ends June 27, 2020.
Financial Performance and Position
| Metric | Three months ended December 31, 2019 | Three months ended December 31, 2018 | Six months ended December 31, 2019 | Six months ended December 31, 2018 |
|---|
| Revenue | $388.3 million | $425.5 million | $728.2 million | $843.1 million |
| Gross margin | 41.0% | 35.2% | 39.2% | 34.5% |
| Operating income | $34.5 million | $25.0 million | $37.7 million | $30.8 million |
| Net income | $19.8 million | $12.8 million | $23.8 million | $16.6 million |
| Diluted EPS | $0.58 | $0.36 | $0.70 | $0.47 |
| Cash flow from operations | Not separately provided | Not separately provided | $120.0 million | $63.5 million |
- Quarterly revenue declined 8.7%; six-month revenue declined 13.6%.
- Quarterly gross profit increased to $159.3 million from $149.8 million, while six-month gross profit declined to $285.5 million from $290.7 million.
- Gross-margin expansion was attributed primarily to favorable product mix and lower amortization of acquired intangibles that had become fully amortized.
- Cash and cash equivalents were $424.8 million at December 31, 2019, up from $327.8 million at June 30, 2019. Approximately $172.7 million was held by foreign subsidiaries.
- Total liabilities were $765.9 million and stockholders’ equity was $691.3 million at December 31, 2019.
- Convertible notes had a net carrying value of $477.4 million. The notes have a 0.50% coupon and mature June 15, 2022. The $200.0 million revolving credit facility had no outstanding balance.
- The company reported compliance with its revolving-credit covenants and stated that existing liquidity, expected operating cash flow and available credit should fund requirements for at least the next 12 months.
Revenue Mix and Material Changes
| Product market | Three months 2019 | Change versus 2018 | Six months 2019 | Change versus 2018 |
|---|
| Mobile | $217.7 million | Down 20.7% | $402.0 million | Down 25.2% |
| PC | $81.6 million | Up 27.7% | $149.4 million | Up 12.8% |
| IoT | $89.0 million | Up 2.1% | $176.8 million | Up 1.9% |
- Mobile revenue weakness reflected lower unit volumes and slightly lower average selling prices. Mobile units declined 18.4% in the quarter and 24.9% year to date.
- PC revenue benefited from higher unit volumes in the quarter and higher average selling prices. IoT revenue increased primarily from higher unit volumes, partly offset by lower average selling prices.
- Research and development expense declined 8.6% for the quarter and 6.5% for the six months; selling, general and administrative expense declined 11.5% and 15.0%, respectively, largely from restructuring-related headcount reductions and lower operating costs.
- Restructuring expense increased to $13.3 million for the quarter and $19.9 million for the six months, compared with $2.1 million and $10.4 million in the prior-year periods.
- The company adopted ASC 842 lease accounting at the beginning of fiscal 2020, increasing assets by $27.8 million and liabilities by $28.4 million, with no significant income-statement or cash-flow effect.
Cash Flow, Capital Allocation and Unusual Items
- Operating cash flow of $120.0 million was supported by a $55.6 million reduction in inventory and non-cash charges of $81.5 million.
- Investing cash outflow was $10.7 million, including $8.2 million of capital expenditures and $2.5 million for an August 2019 asset acquisition.
- Financing cash outflow was $12.2 million, including $17.0 million for repurchases of 555,663 shares and $8.7 million of payroll taxes on deferred stock and market stock units, partly offset by share-issuance proceeds.
- In August 2019, the company acquired an emerging connectivity-technology startup for $2.5 million in cash, with up to $6.5 million of contingent consideration; $1.3 million was accrued as probable and estimable at December 31, 2019.
- In December 2019, Synaptics agreed to sell its LCD mobile TDDI product-line assets for $120.0 million in cash, plus specified inventory value and assumed liabilities. Closing was expected in the fourth quarter of fiscal 2020, subject to conditions.
- Assets held for sale totaled $37.1 million at December 31, 2019, including $20.9 million of inventory.
- The board had authorized $1.4 billion for share repurchases, with $190.6 million remaining available through July 2021.
Outlook, Risks and Contingencies
- Management expects restructuring activities initiated in November 2019 to be completed by the end of fiscal 2020 and is targeting a lower operating-cost structure.
- The filing does not provide a clear numerical revenue, earnings or margin guidance outlook.
- Key risks include dependence on mobile demand, customer and geographic concentration, reliance on contract manufacturers and limited-source suppliers, short product life cycles, product-mix volatility, intellectual-property claims, restructuring execution, and the ability to complete the TDDI divestiture.
- Customer A represented 21% of quarterly revenue and 15% of six-month revenue; Customer B represented 13% and 11%, respectively. China and Japan were the largest customer-location markets.
- The company identified potential intellectual-property litigation and indemnification obligations, but recorded no liability for indemnification obligations and stated that ordinary-course legal matters were not expected to have a material adverse effect.
- Gross unrecognized tax benefits increased to $20.8 million, with a possible increase of up to $2.6 million within the next 12 months. The filing does not provide a reliable settlement timing estimate.
- Contractual obligations totaled approximately $620.1 million, including $531.5 million of long-term debt obligations, $27.2 million of lease payments, $51.5 million of purchase obligations and other commitments, and $9.9 million of transition-tax payments.
Investor Verification Checklist
- Verify completion timing, proceeds, working-capital adjustments and any gain or loss from the TDDI divestiture.
- Assess whether mobile revenue weakness is stabilizing and whether PC and IoT growth can offset continued mobile declines.
- Track restructuring cash payments, remaining accruals and realized operating-cost savings.
- Review the June 2022 convertible-note maturity, potential conversion or refinancing requirements, and covenant compliance.
- Reconcile cash held by foreign subsidiaries with potential repatriation taxes and U.S. liquidity needs.
- Monitor customer concentration, inventory obligations and the effect of product mix on gross margin.
- Review developments in unrecognized tax benefits, intellectual-property claims and other contingencies.
