Business Context and Reporting Period
Synaptics Incorporated develops and sells semiconductor solutions for touch, display, fingerprint authentication, voice, speech, video, mobile, PC, and Internet of Things applications. The company operates as one segment and outsources manufacturing. This unaudited Form 10-Q covers the 13-week quarter and 26-week year-to-date period ended December 29, 2018; comparative periods ended December 30, 2017. For presentation, the financial statements use December 31 dates.
Financial Performance and Position
| Metric | Three Months Ended Dec. 31, 2018 | Three Months Ended Dec. 31, 2017 | Six Months Ended Dec. 31, 2018 | Six Months Ended Dec. 31, 2017 |
|---|---|---|---|---|
| Net revenue | $425.5 million | $430.4 million | $843.1 million | $847.8 million |
| Gross margin | $149.8 million; 35.2% | $115.2 million; 26.8% | $290.7 million; 34.5% | $229.6 million; 27.1% |
| Operating income/(loss) | $25.0 million | $(24.0) million | $30.8 million | $(40.9) million |
| Net income/(loss) | $12.8 million | $(82.4) million | $16.6 million | $(108.9) million |
| Diluted EPS | $0.36 | $(2.42) | $0.47 | $(3.22) |
- Quarterly revenue declined 1.1%; year-to-date revenue declined 0.6%.
- Quarterly product revenue was $274.4 million from mobile, $63.9 million from PC, and $87.2 million from IoT. Year-to-date revenue was $537.1 million from mobile, $132.5 million from PC, and $173.5 million from IoT.
- Operating cash flow was $63.5 million year to date, compared with $103.2 million in the prior-year period. Cash flow was reduced by increases in accounts receivable, inventory, prepaid assets, and the settlement of acquisition-related obligations.
- Cash and cash equivalents were $283.0 million at December 31, 2018, down from $301.0 million at June 30, 2018. Accounts receivable were $326.0 million and inventory was $145.7 million.
- Convertible notes had a net carrying value of $459.4 million. The notes have $525 million aggregate principal, bear 0.50% interest, and mature in June 2022. The $200 million revolving credit facility had no outstanding balance.
- Year-to-date financing cash use included $77.3 million for repurchases of 1.85 million shares. The remaining repurchase authorization was $148.8 million and expires in July 2019.
Material Changes Versus the Prior Comparable Period
- Gross margin increased 840 basis points for the quarter and 740 basis points year to date. Management attributed the improvement primarily to the absence of acquisition-related inventory fair-value adjustments recorded in the prior-year periods ($18.2 million quarterly and $33.9 million year to date), together with favorable product mix.
- Revenue mix shifted toward mobile and PC in the quarter, while IoT revenue declined. Mobile quarterly revenue increased 4.8%, PC increased 3.6%, and IoT decreased 18.4%. Year to date, mobile declined 3.2%, while PC increased 4.3% and IoT increased 4.5%.
- Quarterly mobile and PC unit volumes declined 16.0% and 15.1%, respectively, but average selling prices increased 24.8% and 22.0%. IoT average selling prices declined 17.2% and units declined 1.5%.
- Research and development expense declined 8.7% in the quarter and 2.8% year to date; selling, general, and administrative expense declined 4.8% and 10.7%, respectively, reflecting restructuring-related headcount reductions and other cost actions.
- Restructuring expense was $2.1 million in the quarter and $10.4 million year to date. The disclosed restructuring programs were substantially complete at December 31, 2018, with a remaining liability of $0.4 million for the fiscal 2019 program.
- The prior-year period included significant tax expense associated with the Tax Cuts and Jobs Act, including the transition tax and deferred-tax remeasurement. The company finalized its accounting for the Act during the second quarter of fiscal 2019.
- The company adopted the new revenue recognition standard using the modified retrospective method. Revenue recognition was substantially unchanged, with certain customer incentive amounts reclassified from accounts receivable to other accrued liabilities.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that existing cash, anticipated operating cash flow, and available revolving credit capacity should be sufficient for working capital, other cash needs, and debt service for at least the next 12 months. No specific revenue or earnings guidance is provided in the filing text.
- Management expects future capital requirements to depend on product development, restructuring, intellectual property protection, manufacturing access, new product introductions, acquisitions, market acceptance, and share repurchases.
- Approximately $235.1 million of cash and cash equivalents was held by foreign subsidiaries and considered indefinitely reinvested. Repatriation could result in state and foreign taxes.
- Contractual obligations totaled $620.4 million, including $534.1 million of long-term debt obligations, $63.3 million of purchase obligations and other commitments, $12.1 million of leases, and $10.9 million of transition tax payable.
- Key risks include semiconductor and electronic-device demand, product and customer concentration, declining unit volumes, pricing pressure, short product life cycles, reliance on limited or single-source suppliers, inventory purchase obligations, intellectual property claims, foreign operations and currency exposure, and execution of restructuring and acquisitions.
- The company remains subject to uncertain tax positions, with gross unrecognized tax benefits of $24.7 million and accrued interest and penalties of $2.3 million at December 31, 2018. The filing states that the liability could increase by up to $4.4 million within the next 12 months.
- The company settled an indemnification claim related to the Amkor litigation in September 2018, retaining $1.9 million of earnout consideration and paying $6.8 million in October 2018. The filing states that ongoing ordinary-course legal matters are not expected to have a material adverse effect.
- The company was in compliance with its revolving-credit covenants at quarter end. Disclosure controls and procedures were effective, and no material change in internal control over financial reporting was reported.
Important Facts for Investors to Verify
- Whether gross-margin improvement is sustainable after the prior-year acquisition-related inventory adjustments roll off.
- Mobile and PC unit-volume trends, IoT pricing pressure, and the effect of product mix on future margins.
- Cash conversion, particularly accounts receivable and inventory growth, as operating cash flow declined year over year.
- Repurchase activity, remaining authorization, and its effect on liquidity and share count.
- Refinancing, repayment, or conversion risk associated with the $525 million convertible notes due in 2022 and compliance with credit-facility covenants.
- Potential changes in uncertain tax benefits, the Altera tax litigation, and future tax guidance under the Tax Cuts and Jobs Act.
- Exposure to major customers, suppliers, intellectual property claims, acquisition integration, and remaining purchase or inventory obligations.