Synaptics Incorporated Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2014, with comparative periods ended March 31, 2013. The filing describes 13-week quarters and is dated May 2, 2014. Synaptics develops and sells interactive user-interface solutions for mobile devices, PCs, and other electronics. The company operates as one segment.
Key financial metrics
| Metric | Three months ended March 31, 2014 | Three months ended March 31, 2013 | Nine months ended March 31, 2014 | Nine months ended March 31, 2013 |
|---|---|---|---|---|
| Net revenue | $204.3 million | $163.3 million | $632.6 million | $433.4 million |
| Gross margin | $92.4 million; 45.2% | $81.1 million; 49.6% | $296.3 million; 46.8% | $210.7 million; 48.6% |
| Operating income/(loss) | $(36.1) million | $23.7 million | $33.1 million | $46.9 million |
| Net income/(loss) | $(40.1) million | $36.4 million | $12.2 million | $53.6 million |
| Diluted earnings/(loss) per share | $(1.12) | $1.07 | $0.33 | $1.58 |
| Operating cash flow | Not separately provided | Not separately provided | $91.1 million | $69.6 million |
- Mobile revenue was $150.7 million in the quarter, up 44.0%, and $447.0 million for the nine months, up 78.2%. Mobile represented 73.8% and 70.7% of revenue, respectively.
- PC revenue was $53.5 million in the quarter, down 8.7%, and $185.6 million for the nine months, up 1.7%.
- Research and development expense increased 34.5% for the quarter and 30.8% for the nine months, primarily due to personnel, infrastructure, acquisition-related headcount, and product-development spending.
- Cash and cash equivalents were $391.5 million at March 31, 2014, compared with $355.3 million at June 30, 2013.
- Accounts receivable were $149.7 million and inventories were $70.2 million at March 31, 2014. Days sales outstanding increased from 58 to 66, while inventory turns declined from 9 to 6.
- The company had no outstanding notes payable at March 31, 2014 after substantially completing settlement of its $2.3 million convertible notes. It also had no borrowings under its $75.0 million revolving credit facility.
Material changes versus the prior comparable period
- Revenue increased 25.1% in the quarter and 46.0% for the nine months, driven primarily by mobile products and the contribution from the Validity acquisition.
- Validity biometric fingerprint products contributed $31.4 million of quarterly revenue and $35.7 million of nine-month revenue following the November 7, 2013 acquisition.
- Gross margin declined 440 basis points in the quarter and 180 basis points for the nine months. Management attributed the decline primarily to acquired-intangible amortization and a greater mix of lower-margin module products.
- The company moved from quarterly operating income of $23.7 million to an operating loss of $36.1 million. The principal factor was a $53.0 million change in contingent consideration expense versus $0.2 million in the prior-year quarter.
- The contingent consideration remeasurement reflected higher forecasted sales of Validity fingerprint products. The estimated fair value of contingent consideration rose to $102.4 million on the balance sheet, including $96.5 million related to Validity and $5.9 million related to Pacinian.
- Operating cash flow increased $21.5 million for the nine months, but investing cash use increased to $51.9 million from $32.8 million, primarily due to the Validity acquisition and higher property purchases.
- Synaptics repurchased $70.3 million of stock during the nine months and received $63.0 million from employee share issuances. The repurchase authorization had $89.6 million remaining at March 31, 2014.
Guidance, outlook, risks, and unusual items
- Management stated that cash, cash equivalents, and anticipated operating cash flows should meet working-capital and other requirements for at least the next 12 months, including Validity contingent consideration obligations.
- Management cited industry estimates for calendar 2014 of approximately 20% smartphone growth, 22% tablet growth, and a 4% decline in notebook shipments. The filing does not provide specific company revenue or earnings guidance.
- Validity earn-out consideration may reach $162.5 million through March 2016; Pacinian earn-out consideration may reach an additional $10.0 million through June 2016. Future fair-value changes may cause significant earnings volatility.
- The acquisition generated $76.4 million of acquired intangible assets, including $57.0 million of in-process research and development. The purchase-price allocation remained preliminary, and the filing expected the in-process projects to be substantially completed within three to six months.
- Synaptics held $18.6 million of auction-rate securities that had failed to settle in auctions and were not liquid. The company reported $348.5 million of cash and cash equivalents held by foreign subsidiaries and stated that repatriation could create additional taxes.
- Key risks include dependence on mobile and other concentrated markets, customer product success, competitive pressures, lengthy design and acceptance cycles, limited supplier sources, lack of long-term purchase or supply commitments, intellectual-property claims, warranty obligations, inventory commitments, and tax-contingency adjustments.
- The company disclosed potential intellectual-property litigation costs and damages, although no specific material liability was recorded. Gross unrecognized tax benefits were $10.4 million, with timing of settlement not reasonably estimable.
Facts investors should verify
- Whether Validity biometric products achieve the forecasted sales underlying the $96.5 million contingent consideration valuation and the potential $162.5 million maximum earn-out.
- Whether mobile growth offsets PC weakness and whether the lower-margin module mix continues to pressure gross margin.
- The completion, timing, and commercial success of the $57.0 million Validity in-process research and development projects.
- Cash requirements for contingent consideration, capital expenditures, inventory commitments, acquisitions, and the remaining stock-repurchase authorization.
- The liquidity and recoverability of the $18.6 million auction-rate securities and the tax consequences of foreign cash repatriation.
- Customer concentration: Customer A represented 32% of quarterly revenue and 35% of accounts receivable at March 31, 2014.