Synaptics Incorporated Fiscal 2019 Form 10-K Summary
Reporting period: Fiscal year ended June 29, 2019. The request metadata references 2018 Q4, but the supplied filing is the fiscal 2019 annual report; fiscal 2018 was a 53-week year versus 52 weeks in fiscal 2019.
Business Context
Synaptics develops custom human-interface semiconductor solutions, including touch, display-driver, touch-and-display integration, fingerprint authentication, voice, audio, imaging, video and related software. Revenue is generated primarily from mobile, PC and IoT applications and is sold mainly through OEM contract manufacturers and distributors. Fiscal 2019 revenue mix was 61.1% mobile, 17.6% PC and 21.3% IoT.
- Mobile revenue was $900.1 million, or 61.1% of total revenue.
- PC revenue was $258.9 million, or 17.6%.
- IoT revenue was $313.2 million, or 21.3%.
- International sales exceeded 86% of revenue; approximately 78% of fiscal 2019 sales were to companies in China, Japan and South Korea.
- Three contract manufacturers or distributors represented 15%, 14% and 10% of revenue, respectively. Certain OEM customers represented approximately 24%, 18% and 11% of revenue.
Financial Performance and Liquidity
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net revenue | $1,472.2 million | $1,630.3 million | Down 9.7% |
| Gross margin | $497.1 million; 33.8% | $480.1 million; 29.4% | Up $17.0 million; 440 bps |
| Operating income/(loss) | $(6.3) million | $(61.9) million | Improved $55.6 million |
| Net income/(loss) | $(22.9) million; $(0.66) diluted EPS | $(124.1) million; $(3.63) diluted EPS | Loss reduced by $101.2 million |
| Cash flow from operations | $154.2 million | $145.0 million | Up $9.2 million |
| Capital expenditures | $23.7 million | $34.1 million | Down $10.4 million |
| Cash and cash equivalents | $327.8 million | $301.0 million | Up $26.8 million |
Revenue declined primarily because mobile unit volume fell 25.2%, partially offset by a 17.9% increase in mobile average selling prices. IoT revenue declined as units fell 1.5% and average selling prices fell 9.6%. PC revenue was essentially flat as a 20.9% increase in average selling prices offset a 17.0% unit decline.
Gross-margin improvement primarily reflected a $38.6 million reduction in acquisition-related inventory fair-value adjustments, lower acquired-intangible amortization charged to cost of revenue and favorable product mix, particularly from higher-margin IoT products.
Operating expenses were $503.4 million, including $341.1 million of research and development, $130.4 million of selling, general and administrative expense, $17.7 million of restructuring costs and $2.5 million of retention costs. Research and development expense declined 6.1%, while selling, general and administrative expense declined 15.3%.
Cash flow from operations exceeded the net loss because of non-cash acquired-intangible amortization of $74.4 million, share-based compensation of $59.0 million and depreciation and amortization of $35.6 million. Cash used in financing activities was $106.6 million, including $118.5 million of share repurchases. Inventory increased to $158.7 million from $131.2 million, and inventory turns declined to five from seven.
Debt, Liquidity and Capital Allocation
- Convertible notes, net, totaled $468.3 million at June 29, 2019. The notes have a $525.0 million principal amount, bear 0.50% interest and mature June 15, 2022.
- The notes have an initial conversion price of approximately $73.02 per share. The company’s policy is to settle principal in cash upon conversion or redemption.
- No amount was outstanding under the $200 million revolving credit facility at fiscal year-end.
- The company reported compliance with its credit-facility covenants.
- Working capital was $477.2 million and total stockholders’ equity was $657.3 million.
- Contractual obligations totaled $616.4 million, including $532.8 million of long-term debt obligations, $11.9 million of lease payments, $61.8 million of purchase obligations and $9.9 million of transition tax payable.
- The company has never paid cash dividends and intends to retain earnings for growth, debt payments and repurchases.
Material Changes Versus Fiscal 2018
- Revenue fell $158.1 million, led by an $120.9 million decline in mobile revenue and a $38.3 million decline in IoT revenue.
- Gross margin improved from 29.4% to 33.8%, despite the revenue decline.
- The operating loss narrowed from $61.9 million to $6.3 million, and the net loss narrowed from $124.1 million to $22.9 million.
- Operating cash flow increased modestly to $154.2 million.
- Restructuring costs increased to $17.7 million from $12.0 million. A June 2019 restructuring was expected to be completed in the first half of fiscal 2020.
- Fiscal 2019 included $2.5 million of retention costs related to executive leadership transition; the retention program continues through November 2020.
- The company repurchased $118.5 million of common stock during fiscal 2019. In August 2019, the board authorized an additional $100 million and extended the program through July 2021.
- Conexant and Marvell acquisition results were included for a full fiscal year in fiscal 2019, compared with partial periods in fiscal 2018.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear quantitative fiscal 2020 revenue or earnings outlook. Management identified OLED display-driver and touch products, tablets, VR/AR, smart-home voice and video, automotive and other IoT applications as opportunities. Management also stated that the company expects existing cash, operating cash flow and available credit to fund working capital and other requirements for at least the next 12 months.
- Key risks include mobile-market volatility, declining smartphone demand, intense competition, pricing pressure and rapid technological change.
- Customer concentration is significant, and purchase orders generally may be delayed, reduced or canceled with limited penalties.
- The company relies on a limited number of Asia-based semiconductor fabricators and contract manufacturers, generally without long-term capacity or pricing guarantees.
- International operations expose the company to tariffs, export controls, sanctions, geopolitical conditions, supply disruptions and foreign-exchange risk. A hypothetical 10% adverse currency movement would have affected fiscal 2019 pretax operating loss by approximately $16.9 million, assuming no hedging.
- The company assumed environmental remediation and potential claims related to the former Conexant site.
- Convertible-note conversion could dilute shareholders, while the credit facility contains leverage, interest-coverage, capital-expenditure and other restrictive covenants. LIBOR discontinuation is expected to require a successor reference rate.
- Goodwill impairment testing identified triggering events, but no goodwill impairment was recorded. No long-lived-asset impairment was recorded.
- The company adopted the new revenue standard in fiscal 2019; management stated that recognition was substantially unchanged, although certain customer obligations were reclassified on the balance sheet.
- Management and KPMG concluded that disclosure controls and internal control over financial reporting were effective as of June 29, 2019.
Important Facts for Investors to Verify
- Whether mobile revenue and unit volumes stabilize after the fiscal 2019 decline and whether OLED, automotive and IoT products offset mobile weakness.
- The sustainability of the 33.8% gross margin and the extent to which fiscal 2019 improvement depended on nonrecurring acquisition-related inventory adjustments.
- Future restructuring, retention and acquisition-related costs, including the remaining $5.2 million restructuring accrual at fiscal year-end.
- Cash generation relative to the $525 million convertible-note maturity in 2022 and the company’s ongoing share-repurchase program.
- Customer concentration, backlog quality and the cancellability of the $277.0 million backlog.
- Inventory growth, declining inventory turns and potential losses on inventory purchase obligations.
- Exposure to China-related tariffs, export restrictions, supply-chain interruptions and currency movements.
- Potential environmental costs at the Conexant site and the $18.9 million of unrecognized tax benefits, for which the filing estimates a possible next-12-month change of $(1.8) million to $3.0 million.