Synaptics Incorporated — Form 10-Q Summary
Business context and reporting period
Synaptics develops semiconductor solutions for human-interface applications, including touch, display-driver, fingerprint, voice, speech and video products used in mobile, PC and Internet of Things devices. The filing covers the second quarter of fiscal 2018, a 13-week period ended December 30, 2017, presented in the financial statements as December 31, 2017. The six-month comparison covers 27 weeks in fiscal 2018 versus 26 weeks in fiscal 2017.
Fiscal 2018 results include Conexant from July 25, 2017 and the acquired Marvell multimedia solutions business from September 8, 2017. The company operates in one reportable segment and relies on outsourced manufacturing, including certain single-source or limited-source suppliers.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2017 | Six months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Revenue | $430.4 million | $461.3 million | $847.8 million | $847.5 million |
| Gross profit | $115.2 million | $138.7 million | $229.6 million | $262.1 million |
| Gross margin | 26.8% | 30.1% | 27.1% | 30.9% |
| Operating income/(loss) | $(24.0) million | $28.8 million | $(40.9) million | $34.4 million |
| Net income/(loss) | $(82.4) million | $22.8 million | $(108.9) million | $26.5 million |
| Diluted EPS | $(2.42) | $0.64 | $(3.22) | $0.74 |
Mobile revenue declined 30.5% year over year in the quarter to $261.8 million, reflecting a 41.1% unit decline partly offset by an 18.0% increase in average selling price. PC revenue declined 3.3% to $61.7 million. IoT revenue increased 411.5% to $106.9 million, primarily due to the Conexant and Marvell acquisitions. For the six-month period, mobile revenue declined 19.7%, while PC revenue increased 7.0% and IoT revenue increased 334.8%.
Quarterly gross margin fell 330 basis points, primarily because of $18.2 million of acquisition-related inventory fair-value adjustments and an $8.2 million increase in acquired-intangible amortization charged to cost of revenue. Six-month gross margin declined 380 basis points, reflecting $33.9 million of inventory fair-value adjustments and a $12.0 million increase in acquired-intangible amortization.
Quarterly research and development expense increased 25.4% to $92.2 million, and selling, general and administrative expense increased 15.8% to $37.4 million. Restructuring expense was $6.6 million in the quarter. Total operating expenses increased 26.7% to $139.2 million.
Interest and other expense was $4.7 million in the quarter and $10.7 million for six months, mainly reflecting convertible-note discount and issuance-cost amortization. The company recorded income-tax expense of $53.3 million in the quarter and $56.5 million for six months, including a provisional $46.5 million impact from the 2017 Tax Cuts and Jobs Act.
Operating activities generated $103.2 million of cash in the first six months, compared with $52.4 million in the prior-year period. Investing activities used $423.1 million, including $395.9 million for acquisitions, $19.5 million for capital expenditures and $7.7 million for intangible assets. Financing activities provided $204.4 million, primarily from $514.5 million of net convertible-debt proceeds, partly offset by $220.0 million of debt repayment and $93.6 million of share repurchases.
Cash and cash equivalents were $252.2 million at December 31, 2017, down from $367.8 million at June 30, 2017. Accounts receivable were $236.4 million and inventories were $140.6 million. The company reported $442.2 million of net convertible notes and no outstanding balance under its revolving credit facility, which had commitments of up to $200 million. Management stated that available cash, expected operating cash flow and available credit should cover working capital, debt service and other requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Quarterly revenue declined 6.7%, while six-month revenue was approximately flat.
- The revenue mix shifted materially away from mobile and toward IoT products following the acquisitions.
- The company moved from operating and net profitability to operating and net losses.
- Gross margin contracted substantially because of acquisition purchase-accounting adjustments and higher amortization.
- Research and development and selling, general and administrative spending increased due in part to acquired personnel and operations.
- Conexant and Marvell increased goodwill to $368.3 million and acquired intangible assets, net, to $263.5 million at December 31, 2017.
- The company issued $525 million principal amount of 0.50% convertible senior notes due 2022, retired prior bank debt and established a new revolving facility.
- The company repurchased 1,698,400 shares for $93.6 million during the six months; $226.1 million remained authorized under the repurchase program.
Guidance, outlook, commentary and risks
The filing does not provide specific quarterly or annual revenue or earnings guidance. Management expects additional fiscal 2018 restructuring costs of approximately $2.9 million to $3.9 million; total costs for the November 2017 restructuring plan are currently estimated at $9.5 million to $10.5 million. The plan is intended to reduce operating costs and capture acquisition synergies.
Management identifies IoT expansion through the Conexant and Marvell transactions as a growth opportunity, but the acquired businesses contributed operating losses of approximately $27.2 million and $9.1 million, respectively, from their acquisition dates through December 31, 2017. Acquisition purchase-price allocations remain preliminary and may change during the measurement period.
The Tax Cuts and Jobs Act produced a significant provisional tax charge. The company had not completed its accounting for all tax effects, including the final calculation of foreign earnings and potential consequences of other provisions, so the recorded amounts may change.
- Mobile-unit declines and dependence on major customers may pressure revenue.
- Acquisition integration, acquisition-related losses, inventory adjustments and intangible amortization may continue to weigh on margins and earnings.
- The company faces semiconductor supply, manufacturing-capacity and limited-supplier risks.
- Intellectual-property infringement claims could result in litigation costs, damages or business disruption. The Amkor dispute was settled in 2017, but the related $8.7 million Validity earnout amount remained retained pending resolution of indemnification matters.
- The convertible notes and secured revolving facility impose repayment, conversion, covenant and refinancing obligations. The company was in compliance with its credit-facility covenants at quarter-end.
- $162.2 million of cash was held by foreign subsidiaries and may incur state or foreign taxes if repatriated.
- The company excluded Conexant from its internal-control assessment during the permitted acquisition integration period; its control environment was still being assessed.
Important facts for investors to verify
- Whether IoT growth and acquisition synergies offset continuing mobile weakness and acquired-business operating losses.
- The final purchase-accounting adjustments for Conexant and Marvell, including inventory fair values, goodwill and intangible-asset values.
- The sustainability of gross margins after acquisition-related inventory adjustments and amortization decline.
- The final tax impact of the Tax Cuts and Jobs Act and any changes to deferred-tax assets, transition-tax liabilities or foreign-earnings estimates.
- Cash generation, the timing of the $442.2 million convertible-note obligation and compliance with revolving-facility covenants.
- The remaining restructuring costs, expected savings and any further facility-consolidation charges.
- Resolution of the retained $8.7 million Validity earnout and related Amkor indemnification matter.
- Customer concentration, supplier concentration and the company’s ability to manage declining mobile volumes.