Synaptics Incorporated 10-Q Summary
Business Context and Reporting Period
Synaptics develops and sells semiconductor solutions for human-interface applications in mobile, communications, entertainment, and personal-computing devices. The filing covers the 13-week fiscal quarter ended September 26, 2015; financial statements are presented using September 30, 2015 calendar quarter-end dates. Results include the post-acquisition operations of Renesas SP Drivers, Inc. (RSP), acquired October 1, 2014.
Financial Performance and Position
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net revenue | $470.0 million | $282.8 million | Up 66.2% |
| Gross profit | $163.8 million | $120.3 million | Up 36.2% |
| Gross margin | 34.9% | 42.5% | Down 760 basis points |
| Operating income | $33.8 million | $36.3 million | Down 6.9% |
| Net income | $23.8 million | $26.6 million | Down 10.5% |
| Diluted EPS | $0.62 | $0.68 | Down $0.06 |
| Operating cash flow | $12.3 million | $60.4 million | Down $48.1 million |
- Mobile product revenue was $412.1 million, up 106.3%, and represented 87.7% of total revenue. PC product revenue was $57.9 million, down 30.2%.
- RSP-related display-driver products were the primary driver of revenue growth but carried lower gross margins. Acquired-intangible amortization included in cost of revenue and operating expenses totaled $19.1 million, versus $4.3 million in the prior-year quarter.
- Research and development expense increased 40.0% to $80.5 million; selling, general, and administrative expense increased 30.9% to $40.2 million.
- Operating margin was 7.2%, compared with 12.8% in the prior-year quarter. Net margin was approximately 5.1%, compared with 9.4%.
- Cash and cash equivalents were $274.5 million at September 30, 2015, down from $399.9 million at June 30, 2015. Approximately $194.2 million was held by foreign subsidiaries.
- Accounts receivable were $349.1 million and inventories were $146.5 million. Days sales outstanding increased from 61 to 67 days; annual inventory turns remained 8.
- Debt outstanding was $244.4 million, consisting of term and revolving borrowings. Balance-sheet debt included $13.1 million of current maturities and $227.5 million of long-term debt, net of issuance costs.
- The company was in compliance with its debt covenants. The credit agreement required a leverage ratio no greater than 2.50 to 1.0 during the first two years and an interest coverage ratio of at least 3.50 to 1.0.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially due to the RSP acquisition and higher mobile display-driver unit sales, while PC revenue declined.
- Gross margin contracted because RSP display-driver products generated lower margins and because of increased acquired-intangible amortization.
- Despite higher gross profit, operating income and net income declined because of increased R&D and SG&A spending, a $2.7 million increase in contingent-consideration expense versus a $4.5 million benefit in the prior year, $1.9 million of RSP restructuring costs, higher amortization, and interest expense on acquisition-related debt.
- Operating cash flow declined primarily because of increases in accounts receivable and inventory, reductions in accounts payable and acquisition-related liabilities, and lower income-tax payables.
- The company repurchased 1,668,713 shares for $125.0 million during the quarter. Remaining repurchase authorization was $273.3 million as of October 2015.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide a specific quarterly or annual revenue, margin, or earnings guidance figure.
- Management cited industry estimates for calendar 2015 of approximately 10.4% smartphone growth, 8.0% tablet decline, 86.5% detachable-tablet growth, 5.8% notebook decline, and 120.4% wearable-market growth, while noting that actual company revenue may differ.
- Contingent consideration may require additional cash payments of up to $102.2 million for Validity-related earn-outs through March 2016 and up to $10.0 million for Pacinian-related earn-outs through June 2016. The estimated fair value of these liabilities was $37.3 million at September 30, 2015.
- The company expected to settle a $60.3 million RSP indemnification holdback in the fourth quarter of fiscal 2016. Total contractual obligations were reported at $406.0 million, including debt, leases, purchase obligations, and other long-term obligations.
- Failed auction-rate securities had a fair value of $15.0 million, were illiquid, and were below investment grade. Accessing the funds before recovery could result in a loss of principal.
- Foreign-exchange remeasurement produced a $3.1 million loss in SG&A, partially offset by $1.7 million of unrealized gains on foreign-currency forward contracts.
- Key risks include lower-margin product mix, dependence on mobile customers and major customers, supplier concentration, demand volatility, intellectual-property litigation, foreign-currency exposure, variable-rate debt, contingent acquisition obligations, and potential tax liabilities.
- The company disclosed pending patent litigation against competitors, a Japan tax audit notification, and uncertainty surrounding the Altera tax case. Gross unrecognized tax benefits were $11.9 million, plus $1.2 million of accrued interest and penalties.
- On October 20, 2015, after quarter-end, the revolving credit commitment was increased from $150.0 million to $250.0 million.
- Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the RSP-driven revenue increase can be sustained without further deterioration in gross margin.
- Mobile versus PC product demand, customer concentration, and the effect of major-customer purchasing patterns on accounts receivable.
- Cash conversion, elevated days sales outstanding, inventory levels, and the impact of continued share repurchases on liquidity.
- Timing and ultimate cash cost of Validity, Pacinian, and RSP contingent or holdback obligations.
- Debt amortization, variable interest rates, covenant headroom, and the post-quarter-end increase in revolving capacity.
- Recoverability and liquidity of the auction-rate securities and the location of cash held by foreign subsidiaries.
- Potential exposure from intellectual-property claims, the Japan tax audit, unrecognized tax benefits, and other tax-law developments.