Synaptics Incorporated — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2012, filed May 4, 2012. The request metadata identifies “2011 Q3,” but the filing itself reports fiscal 2012 results. The three-month periods were 13 weeks; the nine-month fiscal 2012 period included 40 weeks versus 39 weeks in the comparable fiscal 2011 period. Financial statements are unaudited.
Business Context and Reporting Period
Synaptics develops and sells custom human-interface solutions for electronic devices. Revenue is reported in one segment across PC applications and digital lifestyle products, including mobile products. Production is outsourced under a variable-cost model, with no long-term supply contracts with contract manufacturers.
- Third-quarter revenue mix: PC applications 49.4%; digital lifestyle applications 50.6%, including $64.7 million from mobile products.
- Revenue by customer location was concentrated in China at $77.1 million, or approximately 58.5% of quarterly revenue.
- Customer A represented 12% of quarterly revenue and 11% of accounts receivable at March 31, 2012.
Key Financial Metrics
| Metric | Three months ended Mar. 31, 2012 | Three months ended Mar. 31, 2011 | Nine months ended Mar. 31, 2012 | Nine months ended Mar. 31, 2011 |
|---|---|---|---|---|
| Net revenue | $131.7 million | $142.4 million | $410.6 million | $455.2 million |
| Gross margin | $62.2 million; 47.2% | $57.6 million; 40.5% | $192.2 million; 46.8% | $185.5 million; 40.7% |
| Operating income | $14.7 million; 11.2% | $14.4 million; 10.1% | $52.2 million; 12.7% | $56.2 million; 12.4% |
| Net income | $11.4 million; 8.7% | $13.5 million; 9.5% | $41.8 million; 10.2% | $49.9 million; 11.0% |
| Diluted EPS | $0.33 | $0.38 | $1.22 | $1.40 |
| Operating cash flow | Not separately provided | Not separately provided | $79.7 million | $64.5 million |
- Research and development expense increased 13.3% year over year in the quarter to $29.4 million and 12.9% for the nine months to $87.5 million.
- Quarterly SG&A increased 4.6% to $18.0 million; nine-month SG&A increased 1.4% to $52.5 million.
- Share-based compensation expense was $9.0 million for the quarter and $25.7 million for the nine months.
- The quarterly effective tax rate was 23.7%, versus 8.0% in the prior-year quarter; the nine-month rate was 21.0%, versus 12.4%.
Balance Sheet, Debt, Liquidity, and Cash Flow
- Cash and cash equivalents were $324.1 million at March 31, 2012, up from $247.2 million at June 30, 2011.
- Total current assets were $452.1 million versus $374.2 million at June 30, 2011; total current liabilities were $94.9 million versus $92.8 million.
- Debt was limited to $2.3 million of notes payable. The company had no borrowings under its $50.0 million Wells Fargo working-capital line of credit, which was scheduled to expire September 1, 2012.
- Nine-month operating cash flow of $79.7 million was driven by net income, noncash charges, and working-capital changes. Capital expenditures were $7.8 million.
- The company repurchased 1,391,323 shares for $33.5 million during the nine months. The remaining share-repurchase authorization was $134.3 million at March 31, 2012, expiring in October 2013; no repurchases occurred during the third quarter.
- Days sales outstanding increased from 59 to 65 days, and annual inventory turns declined from 11 to 10 between June 30, 2011 and March 31, 2012.
- Management stated that cash and expected operating cash flow should meet working-capital and other cash needs for at least the next 12 months. However, $271.0 million of cash was held by foreign subsidiaries and could incur taxes if repatriated.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 7.5%, primarily because digital lifestyle revenue fell 17.5%, partly offset by 5.6% growth in PC applications. Nine-month revenue declined 9.8%.
- Mobile revenue declined because customers shifted from higher-priced full sensor-module solutions to lower-priced chip or tail solutions, despite higher mobile unit shipments.
- Gross margin improved 670 basis points in the quarter and 610 basis points for the nine months, primarily from the favorable mobile product mix.
- Quarterly operating income increased 2.2% despite lower revenue, but nine-month operating income declined 7.1% because increased operating expenses more than offset gross-margin improvement.
- Net income declined 15.2% in the quarter and 16.1% for the nine months, principally reflecting higher taxes and lower pre-tax income.
- PC applications increased to 49.4% of quarterly revenue from 43.3% in the prior-year quarter; digital lifestyle applications fell to 50.6% from 56.7%.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide explicit company revenue or earnings guidance. Management cited industry estimates of approximately 9% notebook-market growth and more than 30% smartphone-market growth for calendar 2012.
- Key risks include economic conditions, customer-product success, competitive changes, lengthy design and acceptance cycles, dependence on key markets and customers, lack of long-term purchase or supply commitments, supplier concentration, warranty obligations, and intellectual-property infringement claims.
- Failed-auction-rate securities totaled $18.1 million at fair value and were not liquid. The company reported $14.0 million of cumulative other-than-temporary impairment in retained earnings. These securities generally mature after five years, and their valuation could change materially.
- Gross unrecognized tax benefits increased to $22.4 million, with $2.1 million of accrued interest and penalties. An IRS audit was ongoing, and proposed adjustments could produce an approximately $1.0 million tax liability excluding interest and penalties. The company intends to contest the adjustments.
- The federal research credit expired December 31, 2011, and future reinstatement was uncertain, creating potential effective-tax-rate volatility.
- The company recorded a $1.3 million impairment of property and equipment in the nine-month cash-flow reconciliation and recognized net investment-impairment recoveries of $46,000 for the quarter and $59,000 for the nine months.
- Management reported no material changes in market risk, no significant changes in critical accounting policies, and effective disclosure controls.
Investor Verification Checklist
- Verify the sustainability of the 47.2% quarterly gross margin and whether the chip-or-tail mobile mix continues.
- Assess whether digital lifestyle and mobile revenue declines reflect temporary mix effects or a broader loss of demand or market share.
- Review the impact of increased R&D spending and staffing on future product launches and operating margins.
- Monitor the IRS audit, proposed $1.0 million adjustment, $22.4 million unrecognized tax benefit balance, and possible reinstatement of the federal research credit.
- Evaluate liquidity excluding the $18.1 million of illiquid auction-rate securities and considering the $271.0 million of foreign-held cash.
- Track customer concentration, China exposure, accounts-receivable aging, rising days sales outstanding, and supplier concentration.
- Confirm the status and renewal or replacement of the $50.0 million bank credit facility after its scheduled September 1, 2012 expiration.