Synaptics Incorporated — Fiscal 2020 First-Quarter 10-Q Summary
Business Context and Reporting Period
Synaptics develops and sells semiconductor solutions for mobile, personal computing, and Internet of Things devices, including touch, display-driver, fingerprint, voice, speech, and video products. The filing covers the 13-week quarter ended September 28, 2019, with financial statements presented as of and for the period ended September 30, 2019 for simplicity. Results are unaudited.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net revenue | $339.9 million | $417.6 million | Down 18.6% |
| Gross profit | $126.2 million | $140.9 million | Down 10.4% |
| Gross margin | 37.1% | 33.7% | Up 340 basis points |
| Operating income | $3.2 million | $5.8 million | Down 44.8% |
| Operating margin | 0.9% | 1.4% | Down 50 basis points |
| Net income | $4.0 million | $3.8 million | Up 5.3% |
| Diluted EPS | $0.12 | $0.11 | Up $0.01 |
| Cash flow from operations | $47.3 million | $4.6 million | Up $42.7 million |
Revenue by product market was $184.3 million from Mobile, $67.8 million from PC, and $87.8 million from IoT. Mobile revenue declined 29.8%, primarily from a 31.0% unit-volume decline. PC revenue declined 1.2%, while IoT revenue increased 1.7%.
Cash and cash equivalents were $350.8 million at September 30, 2019, compared with $327.8 million at June 30, 2019. Inventory declined to $138.2 million from $158.7 million. Accounts receivable was $232.2 million, and total current assets were $737.1 million against current liabilities of $247.5 million.
Convertible notes had a net carrying value of $472.8 million and an original principal amount of $525 million. The notes bear 0.50% interest and mature June 15, 2022. The company had no borrowings under its $200 million revolving credit facility and was in compliance with its debt covenants. Total debt-related contractual obligations, including principal and interest, were reported at $532.8 million.
Material Changes Versus the Prior Comparable Period
- Revenue fell $77.7 million, driven mainly by weaker Mobile demand and lower PC unit volumes.
- Gross margin improved to 37.1% from 33.7%, primarily because of favorable product mix.
- Operating expenses declined to $123.0 million from $135.1 million. Research and development declined 4.4%, selling, general, and administrative expense declined 18.9%, and restructuring expense declined 20.5%.
- Interest and other expense increased to $3.6 million from $1.9 million, partly because the prior-year period included a $2.8 million investment impairment recovery.
- Net income increased modestly despite lower revenue and operating income, helped by a $4.9 million income-tax benefit compared with a $0.3 million benefit in the prior-year period.
- Operating cash flow improved substantially, aided by a $20.5 million inventory reduction and lower accounts-receivable investment.
- The company repurchased 555,663 shares for $17.0 million during the quarter. Remaining repurchase authorization was $190.6 million.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide quantitative revenue or earnings guidance. Management stated that existing cash, expected operating cash flows, and available revolving-credit capacity should be sufficient for working capital, capital requirements, and debt service for at least the next 12 months.
- Restructuring costs were $6.6 million, with the related cost-reduction activities expected to be completed in the second quarter of fiscal 2020. The remaining restructuring liability was $5.0 million at September 30, 2019.
- In August 2019, the company acquired an emerging technology startup focused on high-speed connectivity products. It paid $2.5 million in cash, expensed $3.7 million of acquired in-process research and development, and accrued $1.3 million of currently estimable contingent consideration. Total possible contingent consideration was up to $6.5 million.
- The company adopted ASC 842 for leases, increasing assets by $27.8 million and liabilities by $28.4 million at adoption. Operating lease liabilities totaled $26.2 million at quarter-end.
- Foreign subsidiaries held $133.0 million of cash and cash equivalents that management considered indefinitely invested overseas; repatriation could create additional taxes.
- Key risks include semiconductor and end-market demand volatility, customer concentration, dependence on Asian customers and limited suppliers, product and inventory obligations, intellectual-property litigation, restructuring execution, debt refinancing or repayment requirements, foreign exchange exposure, and tax uncertainties.
- Gross unrecognized tax benefits were $20.1 million, with a possible increase of up to $2.5 million over the following twelve months. The filing does not provide a reliable settlement timetable.
Important Facts for Investors to Verify
- Whether the sharp Mobile unit decline persists and whether IoT growth can offset Mobile and PC weakness.
- Whether the improved 37.1% gross margin is sustainable or primarily reflects temporary product mix.
- Progress and remaining costs from the fiscal 2019 restructuring program.
- Cash generation, share repurchases, and the company’s ability to address the $525 million convertible-note maturity in 2022.
- Potential contingent consideration and commercial commitments associated with the August 2019 asset acquisition.
- Customer concentration and geographic exposure, including China, which represented $176.8 million of quarterly revenue.
- Developments in intellectual-property claims, tax examinations, unrecognized tax benefits, and the Altera-related tax litigation.