Synaptics Incorporated — Form 10-Q Summary
Business Context and Reporting Period
Synaptics develops semiconductor solutions for touch, display drivers, fingerprint authentication, voice and speech, and video applications used in mobile, PC, and Internet of Things devices. The filing covers the three and nine months ended March 31, 2018, corresponding to fiscal 2018 periods of 13 and 40 weeks. The comparable prior-year periods were the three and nine months ended March 25, 2017.
Fiscal 2018 includes results from the Conexant acquisition beginning July 25, 2017, and the Marvell Multimedia Solutions business acquisition beginning September 8, 2017.
Financial Performance and Key Metrics
| Metric | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | Nine Months Ended March 31, 2018 | Nine Months Ended March 31, 2017 |
|---|---|---|---|---|
| Net revenue | $394.0 million | $444.2 million | $1,241.8 million | $1,291.7 million |
| Gross margin | $122.9 million; 31.2% | $134.7 million; 30.3% | $352.5 million; 28.4% | $396.8 million; 30.7% |
| Operating income/(loss) | $(12.3) million | $12.3 million | $(53.2) million | $46.7 million |
| Net income/(loss) | $(13.7) million | $4.5 million | $(122.6) million | $31.0 million |
| Diluted EPS | $(0.40) | $0.13 | $(3.61) | $0.87 |
| Operating cash flow | Not separately provided | Not separately provided | $137.1 million | $104.5 million |
- Mobile revenue declined 33.7% in the quarter and 24.6% year to date, primarily from lower unit volumes, partly offset by higher average selling prices.
- PC revenue increased 13.2% in the quarter and 8.9% year to date.
- IoT revenue increased 308.3% in the quarter and 325.2% year to date, largely reflecting the Conexant and Marvell acquisitions.
- Quarterly gross margin improved 90 basis points due primarily to product mix, including higher-margin IoT products. Year-to-date gross margin fell 230 basis points, primarily because of acquisition-related inventory fair-value adjustments and increased acquired-intangible amortization.
- Research and development expense increased 30.9% in the quarter and 24.9% year to date, mainly due to additional personnel and acquisition-related activities.
- Interest and other expense increased to $4.7 million in the quarter and $15.4 million year to date, primarily due to the convertible notes and related discount and issuance-cost amortization.
Liquidity, Cash Flow, Debt, and Capital Allocation
- Cash and cash equivalents were $283.4 million at March 31, 2018, down from $367.8 million at June 30, 2017.
- Operating activities generated $137.1 million during the first nine months, while investing activities used $431.6 million, including $396.4 million for acquisitions, $27.5 million for capital expenditures, and $7.7 million for intangible assets.
- Financing activities provided $210.0 million, including $514.5 million of net convertible-note proceeds, partly offset by $220.0 million of debt repayment and $93.6 million of share repurchases.
- The company had $446.5 million of convertible notes outstanding, net of issuance costs, at March 31, 2018. The notes bear a 0.50% coupon and mature June 15, 2022; the initial conversion price was approximately $73.02 per share.
- The prior $220.0 million bank debt was retired. The amended revolving credit facility provides commitments of up to $200 million, with no balance outstanding at quarter-end. The company was in compliance with its debt covenants.
- The company held $187.7 million of cash at foreign subsidiaries considered indefinitely reinvested overseas, which could incur state and foreign taxes if repatriated.
- The board’s cumulative share-repurchase authorization was $1.3 billion, with $226.1 million remaining as of March 31, 2018. No repurchases occurred during the quarter; year-to-date repurchases totaled 1,698,400 shares for $93.6 million.
Material Changes, Outlook, Risks, and Unusual Items
- The Conexant and Marvell transactions materially expanded the IoT business but also contributed acquisition-related amortization, inventory fair-value adjustments, higher operating expenses, and operating losses. Conexant contributed approximately $87.8 million of revenue and $34.7 million of operating loss; Marvell contributed approximately $98.1 million of revenue and $12.7 million of operating loss from their respective closing dates through March 31, 2018.
- The Tax Cuts and Jobs Act resulted in provisional tax expense of $46.2 million for the nine months, including a $49.3 million transition-tax liability, net of foreign tax credits. The company had not finalized its accounting for the tax legislation.
- Restructuring charges were $8.6 million year to date. Management estimated total fiscal 2018 restructuring costs of $9.5 million to $9.9 million for the November 2017 program and expected an additional $0.7 million to $1.1 million. In April 2018, the company initiated a facility closure expected to cost $2.3 million to $2.7 million.
- The company expects existing cash, operating cash flow, and available credit to fund working capital, debt service, contingent consideration, and other requirements for at least the next 12 months. No formal revenue or earnings guidance is provided in the filing.
- Material risks include mobile-market weakness, customer and geographic concentration, dependence on contract manufacturers and limited-source suppliers, product demand and design-win uncertainty, acquisition integration, intellectual-property litigation, inventory and purchase obligations, foreign exchange exposure, and the ability to meet debt covenants and refinance or repay the 2022 convertible notes.
- An $8.7 million Validity-related contingent consideration liability remains retained pending resolution of an indemnification claim associated with the Amkor litigation. The arbitration remains outstanding, although the underlying Amkor case was settled in 2017 on undisclosed terms.
- Disclosure controls were deemed effective. Management excluded Conexant from its internal-control assessment under the SEC’s acquisition integration provisions and was developing additional controls for the acquired business.
Investor Verification Items
- Verify the final purchase-accounting measurements for Conexant and Marvell, including goodwill, acquired intangibles, amortization, and any remaining measurement-period adjustments.
- Monitor whether IoT growth offsets continuing mobile-unit declines and whether the acquired businesses reach profitability.
- Reconcile the reported loss and cash flow after adjusting for acquisition-related amortization, inventory fair-value charges, restructuring, stock-based compensation, and tax-law effects.
- Confirm the final tax accounting under the Tax Cuts and Jobs Act, including the transition-tax liability and deferred-tax remeasurement.
- Assess liquidity and refinancing requirements for the $525 million principal amount of convertible notes due in 2022, including potential dilution or cash settlement upon conversion.
- Review the status and potential financial impact of the Validity/Amkor indemnification arbitration, unrecognized tax benefits of $18.1 million, and other contractual purchase obligations.