Synaptics Incorporated — Fiscal 2020 Form 10-K Summary
Business context and reporting period
The provided filing is Synaptics Incorporated’s Form 10-K for the 52-week fiscal year ended June 27, 2020, filed August 21, 2020. It is not a fiscal 2019 fourth-quarter filing; the quarterly data included in the report covers the quarter ended June 27, 2020.
Synaptics develops fabless semiconductor solutions for IoT, mobile, PC and automotive applications, including connectivity, audio and video SoCs, touch controllers, display drivers, fingerprint sensors and touchpads. Fiscal 2020 revenue was generated across mobile applications, PC applications and IoT applications.
Financial performance and key metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net revenue | $1,333.9 million | $1,472.2 million | Down 9.4% |
| Gross margin | $543.1 million; 40.7% | $497.1 million; 33.8% | Up 690 basis points |
| Operating income/(loss) | $68.9 million; 5.2% | $(6.3) million; (0.4%) | Improved $75.2 million |
| Net income/(loss) | $118.8 million | $(22.9) million | Improved $141.7 million |
| Diluted EPS | $3.41 | $(0.66) | Improved |
| Cash flow from operations | $221.8 million | $154.2 million | Up $67.6 million |
- Revenue mix: mobile applications generated $698.9 million, or 52.4% of revenue; PC applications generated $317.4 million, or 23.8%; and IoT applications generated $317.6 million, or 23.8%.
- Revenue drivers: mobile revenue declined 22.4%, primarily from a 23.5% unit decline and the April 2020 divestiture of the LCD mobile TDDI business. PC revenue increased 22.6%, supported by higher units and average selling prices. IoT revenue increased 1.4%.
- Profitability: gross margin benefited from product mix and a $23.0 million reduction in acquired-intangible amortization charged to cost of revenue. Operating expenses declined to $474.2 million from $503.4 million, although restructuring costs increased to $33.0 million from $17.7 million.
- Unusual item: the sale of the LCD mobile TDDI assets produced $138.7 million of cash proceeds and a $105.1 million gain. This materially increased pretax and net income.
- Liquidity: cash and cash equivalents increased to $763.4 million from $327.8 million. Working capital was $833.5 million, compared with $477.2 million in the prior year.
- Debt: the company had $525.0 million principal amount of 0.50% convertible senior notes due 2022, carried at $486.6 million, and $100.0 million outstanding under a revolving credit facility. The facility has $200.0 million of total commitments and was amended in February 2020.
- Capital allocation: fiscal 2020 financing cash flow included $30.2 million of share repurchases, compared with $118.5 million in fiscal 2019. The repurchase authorization had $177.4 million remaining at year-end and expires in July 2021. Synaptics has never paid a cash dividend.
- Other balance-sheet items: inventories declined to $102.0 million from $158.7 million, while accounts receivable declined to $195.3 million from $230.0 million. Total stockholders’ equity increased to $819.1 million from $657.3 million.
Material changes versus the prior comparable period
- Revenue declined because of weakness and divestiture-related reductions in mobile, while PC revenue expanded substantially and IoT remained broadly stable.
- Gross margin improved from 33.8% to 40.7%, and the company returned to operating profitability.
- Net income benefited substantially from the $105.1 million TDDI divestiture gain; reported earnings therefore are not fully representative of recurring operating performance.
- Research and development expense declined 11.7% to $302.5 million, primarily due to lower headcount and related costs. SG&A declined 3.3% to $127.0 million.
- Operating cash flow increased despite lower revenue, supported by net income, non-cash amortization and working-capital improvements.
- Cash increased partly because of $138.7 million in divestiture proceeds and $100.0 million of revolver borrowings.
- Backlog declined to $256.6 million from $277.0 million, primarily due to lower mobile backlog following the TDDI sale.
Outlook, management commentary, risks and contingencies
The filing does not provide formal fiscal 2021 revenue or earnings guidance. Management stated that existing cash, expected operating cash flow and available credit were expected to cover working capital and other cash requirements for at least the next 12 months, including debt service, while warning that COVID-19 could adversely affect future liquidity and results.
- COVID-19: the company had not experienced significant disruption through the filing date, but the duration and ultimate effects on customers, suppliers, demand, operations and liquidity remained uncertain.
- Debt refinancing: the convertible notes mature June 15, 2022. The revolver generally must be repaid by September 27, 2022, or earlier if the notes have not been refinanced. Credit agreement covenants include leverage, interest coverage, liquidity and capital-expenditure restrictions; the company reported compliance at year-end.
- Customer concentration: two customers represented 18% and 12% of fiscal 2020 revenue, and certain OEMs represented approximately 30%, 12% and 15% of revenue through direct or indirect channels. Customer orders are generally cancellable or reschedulable with limited penalties.
- Geographic and supply-chain exposure: more than 94% of revenue was international, and approximately 78% of sales were to companies in China, Japan and South Korea. Manufacturing and assembly are primarily performed by Asian third parties, often without long-term capacity commitments.
- Trade restrictions: new U.S. export rules affecting Huawei could restrict sales or indirectly reduce Huawei demand. Direct and indirect Huawei sales were less than 10% of June 2020 quarter revenue; longer-term effects were unclear.
- Subsequent acquisitions: after year-end, Synaptics acquired Broadcom’s Wi-Fi, Bluetooth and GPS/GNSS assets for $250 million and agreed to acquire DisplayLink for $305 million, with both transactions closing in July 2020.
- Restructuring: fiscal 2020 restructuring expense was $33.0 million, with $6.1 million of employee severance liabilities remaining at year-end. Remaining activities were expected to be completed by the third quarter of fiscal 2021.
- Contingencies: the company faces ordinary-course litigation, intellectual-property claims, environmental liabilities associated with the former Conexant site and uncertain tax positions. Gross unrecognized tax benefits were $20.1 million.
- Audit and controls: KPMG issued an unqualified opinion and concluded that internal control over financial reporting was effective. The critical audit matter concerned inventory net realizable value and losses on inventory purchase obligations.
Important facts for investors to verify
- Confirm that the requested “2019 Q4” period is intended to refer to the June 27, 2020 quarter or to fiscal 2019, since the source filing is the fiscal 2020 Form 10-K.
- Separate recurring operating earnings from the $105.1 million TDDI divestiture gain when evaluating profitability and valuation.
- Assess the sustainability of the 40.7% gross margin after the mobile divestiture, restructuring actions and changes in product mix.
- Review refinancing requirements and covenant compliance for the $525.0 million convertible notes due 2022 and the $100.0 million revolver balance.
- Evaluate the effect of the July 2020 Broadcom and DisplayLink acquisitions on leverage, integration costs, amortization and future revenue.
- Monitor COVID-19 effects, Huawei export restrictions, customer concentration and dependence on Asian suppliers and contract manufacturers.
- Reconcile reported cash growth with the divestiture proceeds and new revolver borrowing, rather than treating the full increase as recurring free cash flow.