Synaptics Incorporated: Fiscal 2016 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Synaptics develops and sells semiconductor solutions for human-interface applications in mobile devices, PCs, and other electronics. The filing covers the 13-week quarter and 26-week year-to-date period ended December 26, 2015; financial statements are presented using December 31 calendar-quarter dates for convenience. Results include the post-acquisition operations of RSP, acquired October 1, 2014.
Financial Performance and Position
| Metric | Three Months Ended December 31 | Six Months Ended December 31 |
|---|---|---|
| Net revenue | $470.5 million | $940.5 million |
| Gross margin | $165.2 million; 35.1% | $329.0 million; 35.0% |
| Operating income | $45.3 million; 9.6% | $79.1 million; 8.4% |
| Net income | $35.0 million | $58.8 million |
| Diluted earnings per share | $0.93 | $1.55 |
| Operating cash flow | Not separately provided | $106.8 million |
- Mobile applications generated $407.8 million, or 86.7%, of quarterly revenue, and $819.9 million, or 87.2%, of year-to-date revenue. PC applications generated $62.7 million and $120.6 million, respectively.
- At December 31, 2015, cash and cash equivalents were $372.0 million, compared with $399.9 million at June 30, 2015. Foreign subsidiaries held $235.5 million of cash considered indefinitely invested overseas.
- Total debt was approximately $238.7 million on the balance sheet, consisting of $15.0 million current debt and $223.7 million long-term debt; the debt facility reported outstanding borrowings of $242.5 million before balance-sheet presentation adjustments.
- The company had a $250 million revolving credit facility and a $150 million term loan facility. Debt matures primarily in 2019, and the company was in compliance with all financial covenants.
- Total current assets were $892.3 million versus current liabilities of $398.1 million. Accounts receivable were $337.0 million and inventory was $136.6 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 1.5% from $463.7 million, while year-to-date revenue increased 26.0% from $746.5 million. The year-to-date increase was principally driven by RSP-acquired display-driver products and higher mobile unit sales.
- Quarterly mobile revenue increased 2.4%; quarterly PC revenue declined 4.1%. Year-to-date mobile revenue increased 37.1%, while PC revenue declined 18.7%.
- Quarterly gross margin expanded to 35.1% from 27.3%; year-to-date gross margin increased to 35.0% from 33.1%. Management attributed the improvement primarily to lower acquisition-related amortization and stronger margins on RSP display-driver products.
- Quarterly net income rose 66.7% to $35.0 million; year-to-date net income rose 23.5% to $58.8 million.
- Quarterly SG&A increased 86.4% to $41.0 million, partly due to lower foreign-currency gains, higher personnel costs, and legal fees. Year-to-date SG&A increased 54.1% to $81.2 million.
- Research and development expense increased 1.7% for the quarter and 18.0% year to date, reflecting additional personnel, infrastructure, supplies, and software costs.
- Cash from operations increased to $106.8 million from $44.4 million year to date. Financing activities used $116.1 million, primarily because of $125.0 million of share repurchases; investing activities used $18.9 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide explicit revenue or earnings guidance. Management cited industry estimates for calendar 2016 of approximately 7.7% smartphone growth, 2.2% tablet decline, 1.5% notebook decline, 76.2% detachable-tablet growth, and 44.4% wearable growth, while noting actual company revenue may differ.
- Management expected substantially less volatility in contingent consideration as the Validity and Pacinian earn-out periods approach completion.
- Potential additional contingent consideration was up to $100.6 million for Validity through March 2016 and up to $10.0 million for Pacinian through June 2016. The recorded contingent consideration liability was $33.0 million at December 31, 2015.
- The company reported a $59.9 million RSP indemnification holdback liability and anticipated settlement in the fourth quarter of fiscal 2016.
- Synaptics faces intellectual-property litigation, including an October 2015 complaint by Amkor Technology. The company filed an indemnification claim against former Validity holders and intends to reserve most of the remaining Validity earn-out balance against potential Amkor-related costs.
- Failed auction-rate securities had a fair value of $14.2 million, were below investment grade, and were not liquid without potential loss of principal. The company did not expect this limitation to affect normal operations.
- Other risks include customer concentration, dependence on certain suppliers, semiconductor and mobile-market volatility, foreign-currency exposure, variable-rate debt, product-margin variability, tax audits and uncertain tax positions, and potential patent claims.
- The six-month results included a $3.1 million federal research-credit benefit, $1.9 million of RSP-related restructuring costs, $37.9 million of acquired-intangible amortization, and $25.9 million of share-based compensation.
- Disclosure controls were evaluated as effective, and management reported no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Assess the sustainability of the improved gross margin and the contribution and margins of RSP display-driver products.
- Monitor mobile-versus-PC demand, customer concentration, and the effect of major customer purchasing patterns on quarterly revenue.
- Verify cash availability after the $125.0 million repurchase, the $59.9 million RSP holdback, possible earn-out payments, capital expenditures, and debt service.
- Review debt covenant compliance, variable-rate exposure, amortization schedules, and the September 2019 maturity of the revolving facility and final term-loan payment.
- Track Amkor litigation, the Validity indemnification claim, contingent consideration settlements, and any resulting cash or accounting effects.
- Evaluate the liquidity and valuation risk of the $14.2 million auction-rate securities and the tax consequences of repatriating foreign cash.