Business Context and Reporting Period
Synaptics Incorporated designs and sells semiconductor solutions for mobile, personal computing and Internet of Things applications. This unaudited Form 10-Q covers the 13-week fiscal quarter ended September 26, 2020, compared with the quarter ended September 28, 2019. The company operates as one reportable segment and had 34.5 million common shares outstanding at October 29, 2020.
Financial Performance and Position
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $328.4 million | $339.9 million | Down 3.4% |
| Gross profit | $134.5 million | $126.2 million | Up 6.6% |
| Gross margin | 41.0% | 37.1% | Up 390 basis points |
| Operating income | $6.0 million | $3.2 million | Up $2.8 million |
| Net income/(loss) | $(2.8) million | $4.0 million | Down $6.8 million |
| Diluted earnings/(loss) per share | $(0.08) | $0.12 | Declined |
| Cash flow from operations | $6.5 million | $47.3 million | Down $40.8 million |
Revenue by product market was $133.5 million for Mobile, $80.5 million for PC and $114.4 million for IoT. Mobile revenue declined 27.6%, primarily following the divestiture of the LCD TDDI business; PC revenue increased 18.7%, and IoT revenue increased 30.3%, including contributions from the July 2020 acquisitions.
Gross margin benefited from favorable product mix and product cost reductions, partly offset by $10.5 million of additional acquired-intangible amortization and $9.8 million of inventory fair-value adjustments related to the DisplayLink acquisition. Operating expenses were $128.5 million, including $6.7 million of acquired-intangible amortization and $5.6 million of restructuring costs.
At September 26, 2020, cash and cash equivalents were $180.2 million and short-term investments were $63.7 million, compared with $763.4 million of cash at June 27, 2020. Total current assets were $620.0 million and total current liabilities were $257.5 million. Accounts receivable were $227.8 million and inventories were $114.6 million.
Total debt consisted of $100.0 million outstanding under the revolving credit facility and $491.4 million net carrying value of convertible notes. The notes have a $525.0 million principal amount, bear 0.50% interest and mature June 15, 2022. The $200.0 million revolving facility had $100.0 million of availability before considering covenant and other limitations. Synaptics remained in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly, but gross margin improved substantially and operating income nearly doubled.
- Net income declined to a loss because the company recorded a $3.6 million tax provision versus a $4.9 million tax benefit in the prior-year quarter, while interest and other expense also increased.
- Operating cash flow fell sharply, primarily due to higher accounts receivable, lower income taxes payable and increased other assets and prepaid expenses.
- Cash used in investing activities was $594.6 million, including $621.8 million for acquisitions, versus $7.5 million in the prior-year quarter.
- Research and development expense decreased 5.9%, while selling, general and administrative expense increased 28.4%, partly because of higher share-based compensation and acquisition-related legal and accounting fees.
- No shares were repurchased during the quarter. The remaining authorization under the repurchase program was $177.4 million, expiring in July 2021.
Acquisitions, Outlook, Risks and Unusual Items
- Synaptics acquired DisplayLink on July 31, 2020, for preliminary purchase consideration of $443.2 million. The acquisition contributed approximately $16.9 million of quarterly revenue and added $107.3 million of goodwill and $193.0 million of acquired intangible assets on a preliminary basis.
- Synaptics acquired certain Broadcom wireless connectivity assets on July 23, 2020, for adjusted consideration of $226.6 million. The acquired business contributed approximately $15.3 million of quarterly revenue and added $102.8 million of goodwill and $123.0 million of acquired intangible assets.
- Management stated that existing cash, expected operating cash flow and available revolver capacity should be sufficient for working capital, acquisition-related needs and debt service for at least the next 12 months. No quantitative revenue or earnings guidance was provided in the filing.
- Management expects COVID-19-related uncertainty to continue affecting customers, suppliers, operations, liquidity and results. The filing states that significant disruption had not occurred through the reporting date, but the duration and severity remained uncertain.
- Restructuring activities initiated in fiscal 2020 and fiscal 2021 are intended to achieve acquisition synergies and reduce costs; the remaining activities were expected to be completed by the end of fiscal 2021. Quarterly restructuring expense was $5.6 million.
- Future contractual obligations totaled $728.5 million, including $632.4 million of long-term debt principal and interest, $44.1 million of operating leases and $43.9 million of purchase obligations and other commitments.
- Unrecognized tax benefits were $22.0 million, with a possible increase of up to $3.4 million over the following 12 months. The filing also identifies potential intellectual-property claims and dependence on major customers, third-party manufacturers, mobile and PC markets, and limited-source suppliers.
- The company excluded DisplayLink from its internal-control assessment during the permitted acquisition integration period and was still assessing its control environment.
Investor Verification Items
- Verify whether the acquisitions produce the expected IoT revenue growth and operating synergies after integration.
- Monitor cash generation and liquidity given the significant acquisition outflows and the June 2022 convertible-note maturity.
- Assess the sustainability of the 41.0% gross margin after acquisition-related inventory adjustments and amortization normalize.
- Track Mobile revenue recovery following the TDDI divestiture and the relative growth of PC and IoT markets.
- Review COVID-19 effects on customer demand, supply-chain capacity and working capital.
- Confirm final purchase-accounting values, including goodwill, acquired intangibles and related amortization, during the measurement period.
- Evaluate covenant headroom, refinancing requirements and the company’s ability to repay or refinance debt due in 2022.