Business Context and Reporting Period
Synaptics Incorporated develops and supplies custom human-interface solutions for mobile, personal-computing, communications, entertainment, and other electronic devices. The filing is an unaudited Form 10-Q for fiscal 2013, second quarter, covering the 13 weeks ended December 29, 2012; financial statement captions are presented as December 31, 2012. The comparable prior-year quarter covered 14 weeks.
Revenue is generated primarily from PC and mobile product applications. Mobile represented 57.0% of quarterly revenue and 54.1% for the six-month period; PC represented 43.0% and 45.9%, respectively.
Financial Performance and Liquidity
| Metric | Three Months Ended Dec. 31, 2012 | Prior Year | Six Months Ended Dec. 31, 2012 | Prior Year |
|---|---|---|---|---|
| Net revenue | $143.0 million | $145.5 million | $270.1 million | $278.9 million |
| Gross margin | $69.0 million; 48.3% | $68.7 million; 47.2% | $129.6 million; 48.0% | $130.0 million; 46.6% |
| Operating income | $14.9 million; 10.4% | $21.2 million; 14.5% | $23.3 million; 8.6% | $37.5 million; 13.4% |
| Net income | $11.1 million; 7.8% | $17.4 million; 11.9% | $17.2 million; 6.4% | $30.4 million; 10.9% |
| Diluted earnings per share | $0.33 | $0.51 | $0.51 | $0.89 |
- Quarterly PC revenue declined 8.4% to $61.5 million, while mobile revenue increased 4.1% to $81.6 million. For six months, PC revenue declined 8.8% to $123.9 million and mobile revenue increased 2.2% to $146.2 million.
- Research and development expense increased 14.8% in the quarter and 15.5% for six months, primarily from higher employee, temporary-staffing, infrastructure, and acquisition-related costs. Selling, general, and administrative expense increased 7.3% and 10.1%, respectively.
- Six-month operating cash flow was $44.9 million versus $60.2 million in the prior year. Cash used in investing was $23.7 million, including $20.9 million of capital expenditures and a $5.0 million business acquisition. Cash used in financing was $33.6 million, including $31.3 million of share repurchases and $4.6 million of contingent-consideration payments.
- Cash and cash equivalents were $292.5 million at December 31, 2012, compared with $305.0 million at June 30, 2012. Accounts receivable were $99.1 million and inventories were $32.1 million.
- Notes payable totaled $2.3 million. Synaptics had no borrowings under its $50.0 million Wells Fargo working-capital line of credit, which expires September 1, 2013.
- Cash held by foreign subsidiaries totaled $268.0 million and is considered indefinitely invested overseas. Repatriation could result in additional tax obligations.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue decreased 1.7% and six-month revenue decreased 3.2%, primarily because of lower PC unit sales amid a slowdown in the PC market.
- Gross margin improved by 110 basis points in the quarter and 140 basis points for six months, primarily from a favorable mix of higher-margin mobile chip solutions.
- Operating income declined 29.5% in the quarter and 38.0% for six months as higher operating expenses more than offset the gross-margin improvement.
- Net income declined 36.1% in the quarter and 43.5% for six months. The effective tax rate increased to 26.6% from 18.8% for the quarter and to 27.6% from 19.9% for six months.
- The company repurchased 1.24 million shares for $31.3 million during the six months. It had $74.8 million remaining under its $520.0 million repurchase authorization, which expires in October 2013.
- Purchased intangible assets and related amortization arose from recent business activity; six-month acquired-intangible amortization was $501,000, and the contingent-consideration expense was $863,000.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that existing cash and expected operating cash flows should be sufficient for working-capital and other cash requirements for at least the next 12 months. The filing does not provide specific revenue or earnings guidance.
- Management cited industry estimates that calendar-year 2013 notebook shipments could increase approximately 6% and smartphone shipments approximately 27%, but these are industry estimates rather than company guidance.
- Synaptics expects to recognize approximately $2.5 million of federal research-credit tax benefits in its fiscal third quarter following enactment of the American Taxpayer Relief Act of 2012.
- The company is contesting a proposed $2.0 million tax deficiency, excluding interest and penalties, through the IRS appeals process. Gross unrecognized tax benefits were $23.0 million, with $2.4 million of accrued interest and penalties. The outcome could materially affect the effective tax rate.
- Failed auction-rate securities had a fair value of $15.0 million at December 31, 2012. They are illiquid, generally have maturities beyond five years, and included $14.0 million of cumulative other-than-temporary impairment in retained earnings. Management does not expect the lack of liquidity to affect normal operations.
- The company agreed to sell its existing headquarters for approximately $12.6 million, subject to conditions and closing risks, and anticipated closing in late fiscal third quarter or early fiscal fourth quarter. It expects to move into new headquarters in the fourth quarter.
- Key operating risks include PC-market weakness, dependence on major customers and limited suppliers, absence of long-term purchase and supply commitments, lengthy design and acceptance cycles, product warranty claims, intellectual-property infringement claims, technology execution, and changes in product mix and average selling prices.
- Customer concentration remained significant: two customers each represented 12% or more of accounts receivable at December 31, 2012, while one customer represented 15% of six-month revenue in the prior-year period and less than 10% in the current six-month period.
Important Facts for Investors to Verify
- Reconcile the effect of the current quarter's 13-week period with the prior year's 14-week period when assessing revenue and earnings trends.
- Monitor whether mobile growth and higher-margin chip solutions offset continuing PC-market weakness.
- Assess the sustainability of gross-margin improvement against rising research and development and selling expenses.
- Track the IRS appeal, the $23.0 million unrecognized-tax-benefit balance, and the expected $2.5 million research-credit benefit.
- Verify liquidity after share repurchases, capital expenditures, acquisitions, contingent-consideration payments, and the concentration of cash held overseas.
- Review the valuation and liquidity risks associated with the $15.0 million of failed auction-rate securities.
- Confirm the timing, proceeds, lease-back terms, and closing conditions of the headquarters sale.