Business Context and Reporting Period
Synaptics Incorporated develops semiconductor solutions for touch, display-driver, fingerprint-authentication and other human-interface applications used primarily in mobile devices and personal computers. The filing is an unaudited Form 10-Q for the 13 weeks ended September 24, 2016, presented in the financial statements as ending September 30, 2016 for simplicity. The comparable period was the 13 weeks ended September 26, 2015.
Synaptics operates as one segment. Fiscal first-quarter revenue was generated primarily from mobile product applications and, to a lesser extent, PC product applications.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net revenue | $386.2 million | $470.0 million | Down 17.8% |
| Gross margin | $123.4 million; 32.0% | $163.8 million; 34.9% | Down 290 bps |
| Operating income | $5.6 million; 1.5% | $33.8 million; 7.2% | Down 83.4% |
| Net income | $3.7 million; 1.0% | $23.8 million; 5.1% | Down 84.5% |
| Diluted EPS | $0.10 | $0.62 | Down $0.52 |
| Cash flow from operations | $12.3 million | Down $12.3 million |
- Mobile revenue was $331.3 million, down 19.6%, reflecting lower unit sales and average selling prices.
- PC revenue was $54.9 million, down 5.2%; lower unit sales were partially offset by higher average selling prices.
- Research and development expense was $73.4 million, down 8.8%, and selling, general and administrative expense was $34.6 million, down 13.9%.
- Restructuring costs increased to $5.3 million from $1.9 million. Acquired-intangible amortization was $4.5 million, and share-based compensation was $14.6 million.
- Cash and cash equivalents were $301.4 million at September 30, 2016, down from $352.2 million at June 30, 2016. Current assets were $726.0 million versus current liabilities of $304.9 million.
- Debt consisted of $15.0 million of current debt and $213.2 million of long-term debt on the balance sheet. The outstanding Credit Agreement balance was $231.3 million, with interest rates of approximately 1.85% to 1.88% during the quarter.
- The company had $250 million of revolving credit capacity and was in compliance with its financial covenants. Debt maturities include a final $90.0 million term-loan payment due September 30, 2019, and repayment of the revolving facility on that date.
- Investing cash outflows were $20.0 million, including $14.3 million for a direct-financing lease and $5.7 million for property and equipment. Financing cash outflows were $31.3 million, including $25.0 million of share repurchases and $7.5 million of debt repayment.
Material Changes Versus the Prior Comparable Period
- Revenue declined $83.8 million, driven principally by the mobile market. China became the largest customer-location market at $178.3 million, compared with $105.8 million in the prior period; Japan declined to $74.0 million from $229.1 million.
- Gross margin decreased by 290 basis points, primarily because of product mix. The company also recorded approximately $2.8 million of additional inventory charges related to a customer’s cancellation of a smartphone model because of safety issues.
- Operating income fell $28.2 million, reflecting lower gross profit despite reduced research and development and SG&A spending. The prior period included a $2.7 million change in contingent consideration; no such expense was recorded in the current period.
- Operating cash generation declined to approximately breakeven, primarily because of reductions in accounts payable, accrued compensation and acquisition-related liabilities, together with higher inventory.
- The company repurchased 508,063 shares for $25.0 million in the current quarter, compared with 1,668,713 shares for $125.0 million in the prior comparable period. Remaining repurchase authorization was $232.7 million.
- The June 2016 restructuring plan is expected to produce total charges of approximately $14.5 million to $16.0 million, including $11.0 million to $11.5 million of severance and $3.5 million to $4.5 million of lease-cancellation and related costs. The company expects additional charges during fiscal 2017.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear numerical revenue or earnings outlook for the next quarter or full fiscal year. Management stated that existing cash, expected operating cash flows and available revolving-credit capacity should be sufficient for at least the next 12 months.
- Key operating risks include volatility in mobile demand, lower average selling prices, product mix, short product life cycles, customer concentration, reliance on selected suppliers and contract manufacturers, and the need to forecast production capacity and inventory accurately.
- Three customers represented 24%, 23% and 11% of quarterly revenue, respectively. Mobile products represented 85.8% of total revenue, increasing concentration in that market.
- Approximately $167.3 million of cash was held by foreign subsidiaries and could incur tax costs if repatriated.
- The company held $8.6 million of failed auction-rate securities. These investments are illiquid, below investment grade and may not be accessible without a loss of principal.
- Amkor Technology litigation remains unresolved. Synaptics withheld and reserved $12.7 million of Validity contingent consideration against potential claims. A separate IIX dispute resulted in retention of approximately $6.4 million of an indemnification holdback related to the RSP acquisition.
- Unrecognized tax benefits were $13.7 million, with a possible increase of up to $0.8 million within the following 12 months. The company also continues to monitor the Altera tax litigation and appeal.
- Management identified no material change in market-risk exposures and concluded that disclosure controls and procedures were effective as of the period end.
Important Facts for Investors to Verify
- Whether mobile demand, unit volumes and average selling prices stabilize after the 17.8% consolidated revenue decline.
- Whether gross margin can recover from 32.0%, including the effect of product mix, customer-specific products and inventory charges.
- The timing and total cost of the announced restructuring program and whether additional actions will be required.
- Operating cash flow conversion, inventory levels, accounts payable trends and the cash impact of acquisition-related liabilities.
- Debt covenant headroom, variable-rate exposure and the September 2019 debt repayment requirements.
- Potential cash outflows from the Amkor and IIX matters, customer-specific inventory commitments and unrecognized tax benefits.
- Liquidity and valuation risks associated with the failed auction-rate securities and foreign-held cash.