Synaptics Incorporated — Fiscal 2023 Third-Quarter Form 10-Q
Reporting period: Fiscal quarter ended March 25, 2023; comparative quarter ended March 26, 2022. The nine-month periods ended March 25, 2023 and March 26, 2022 are also presented. Synaptics is a fabless semiconductor supplier operating in one segment across IoT, personal computing and mobile applications.
Key Financial Metrics
| Metric | Q3 FY2023 | Q3 FY2022 | Change | Nine Months FY2023 | Nine Months FY2022 |
|---|---|---|---|---|---|
| Net revenue | $326.6 million | $470.1 million | Down 30.5% | $1,127.8 million | $1,263.3 million |
| Gross margin | $172.3 million; 52.8% | $253.8 million; 54.0% | Down 120 bps | $614.7 million; 54.5% | $677.0 million; 53.6% |
| Operating income | $34.2 million; 10.5% | $88.1 million; 18.7% | Down 61.2% | $192.3 million; 17.1% | $226.3 million; 17.9% |
| Net income | $10.4 million; 3.3% | $64.9 million; 13.8% | Down 84.0% | $97.0 million; 8.6% | $174.6 million; 13.8% |
| Diluted EPS | $0.26 | $1.59 | Down $1.33 | $2.41 | $4.29 |
| Operating cash flow | Not separately provided | Not separately provided | — | $237.0 million | $308.4 million |
Q3 revenue included $33.5 million from an intellectual-property license in the IoT category. The filing states that this type of licensing revenue is generally inconsequential historically.
Revenue Mix
- IoT: $231.7 million in Q3, down 23.2%; $813.7 million year to date, up 5.8%. Q3 units declined 14.7% and average selling prices declined 10.0%.
- PC: $53.3 million in Q3, down 40.8%; $175.0 million year to date, down 33.1%. Q3 unit volume declined 41.0%.
- Mobile: $41.6 million in Q3, down 46.9%; $139.1 million year to date, down 40.3%. Q3 units declined 21.3% and average selling prices declined 32.6%.
Liquidity, Cash Flow and Capital Structure
- Cash and cash equivalents were $898.0 million at March 25, 2023, up from $824.0 million at June 25, 2022. Short-term investments were $35.9 million, producing cash, cash equivalents and short-term investments of approximately $933.9 million.
- Year-to-date operating cash flow was $237.0 million, compared with $308.4 million in the prior-year period. Working-capital benefits included a $106.7 million reduction in accounts receivable and a $17.2 million reduction in inventories.
- Investing cash flow was negative $28.1 million, including $15.5 million for the Emza acquisition and $29.0 million of property and equipment purchases.
- Financing cash flow was negative $134.2 million, including $100.1 million of share repurchases, $52.2 million of payroll-tax payments on equity awards and $4.5 million of debt repayment.
- Total debt carrying value was approximately $978.9 million, consisting primarily of $395.4 million of 4.0% senior notes due 2029 and $583.5 million under the term loan facility due 2028. The revolving credit facility had no outstanding balance and provides up to $250 million of capacity.
- The company amended its credit agreement in March 2023 to replace LIBOR with SOFR. Management stated that the company remained in compliance with its debt covenants at quarter-end.
- Management believes existing liquidity, expected operating cash flow and available revolver capacity will fund working capital, debt service and other requirements for at least the next 12 months.
Material Changes and Unusual Items
- Demand weakened broadly as customers and channel partners reduced accumulated inventories and requested order delays. Management attributed the slowdown primarily to recession concerns and expects the recovery could extend into late calendar 2023 or beyond.
- Q3 operating expenses declined to $138.1 million from $165.7 million, partly because prior-year results included $11.3 million of restructuring costs. No restructuring charges were recorded in the first nine months of FY2023.
- Q3 interest expense increased on the variable-rate term loan, but higher interest income substantially offset the increase. A hypothetical 100-basis-point rate change would affect quarterly interest expense by approximately $1.5 million based on the March 2023 term-loan balance.
- The effective tax burden increased materially. Year-to-date tax expense was $73.3 million versus $32.3 million in the prior-year period, influenced by foreign withholding taxes, U.S. research-and-development capitalization rules, GILTI and nondeductible officer compensation.
- Synaptics acquired Emza Visual Sense Ltd. for $15.8 million in October 2022 and acquired Broadcom-developed technology intangible assets for $30.0 million, paid in cash during the prior fiscal year. The Emza acquisition added $9.8 million of goodwill and $8.0 million of intangible assets.
- Year-to-date share repurchases totaled $100.1 million. The filing reports $477.3 million of remaining repurchase authorization, but the MD&A describes cumulative authorization of $2.3 billion while the equity-purchases section describes $1.8 billion; this inconsistency should be verified.
Outlook, Risks and Contingencies
Management expects the current demand slowdown to be temporary but cautions that a meaningful rebound may be delayed. Principal risks include dependence on IoT applications, exposure to cyclical semiconductor and end markets, customer concentration, inventory reductions and cancellations, reliance on third-party manufacturers and limited suppliers, product-design execution, pricing pressure, intellectual-property claims, foreign operations, interest-rate exposure and potential recessionary conditions.
The company reports no material changes to the risk factors in its prior Form 10-K. It is subject to ordinary-course litigation and potential intellectual-property claims; management does not currently expect existing matters to have a material adverse effect. Gross unrecognized tax benefits were $54.5 million, with no reliable estimate of settlement timing. Contractual obligations totaled $1.574 billion, including $1.349 billion of long-term debt obligations, $64.7 million of lease payments and $160.8 million of purchase obligations and other commitments.
Investor Verification Items
- Verify the reported repurchase authorization discrepancy of $2.3 billion versus $1.8 billion and the associated $477.3 million remaining capacity.
- Assess the sustainability of Q3 results excluding the $33.5 million IP-license contribution and the effect of that item on gross margin.
- Monitor inventory normalization, customer order delays and the timing of the expected demand recovery.
- Evaluate exposure to rising SOFR-based borrowing costs and the term loan’s scheduled amortization and future excess-cash-flow sweep.
- Review the unusually higher year-to-date effective tax burden and the $54.5 million of unrecognized tax benefits.
- Track concentration by customers and geography, particularly the substantial revenue exposure to China, Taiwan and Japan and the disclosed major customers.