Synaptics Incorporated: Fiscal 2017 Form 10-K Summary
Reporting period: Fiscal year ended June 24, 2017, a 52-week period. The request references 2016 Q4, but the supplied filing is the fiscal 2017 Form 10-K and includes quarterly data for the three months ended June 2017.
Business context
Synaptics develops custom human-interface semiconductor solutions for smartphones, tablets, notebooks, PCs, automobiles and other electronic devices. Products include touch controllers, display-driver ICs, touch-and-display driver integration products, fingerprint authentication solutions and related firmware and software. Fiscal 2017 revenue was generated primarily from mobile applications, which represented 86.7% of revenue, and PC applications, which represented 13.3%.
The company uses a primarily outsourced, variable-cost manufacturing model and sells largely through contract manufacturers, distributors and supply-chain partners serving major OEMs. International sales exceeded 86% of revenue. Three customers or customer groups represented 24%, 19% and 10% of fiscal 2017 revenue, respectively.
Key financial metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net revenue | $1,718.2 million | $1,666.9 million | +3.1% |
| Gross margin | $523.6 million; 30.5% | $581.5 million; 34.9% | Margin down 440 basis points |
| Operating income | $64.7 million; 3.8% | $75.2 million; 4.5% | -14.0% |
| Net income | $48.8 million | $72.2 million | -32.4% |
| Diluted EPS | $1.37 | $1.91 | Down $0.54 |
| Cash flow from operations | $152.9 million | $256.6 million | Down $103.7 million |
| Cash and cash equivalents | $367.8 million | $352.2 million | +$15.6 million |
| Total debt at fiscal year-end | $220.0 million | Approximately $235.5 million | Reduced by $18.8 million during fiscal 2017 |
| Working capital | $481.6 million | $429.3 million | +$52.3 million |
Fiscal 2017 quarterly revenue was $426.5 million for the June 2017 quarter, compared with $323.9 million for the June 2016 quarter. June 2017 quarterly net income was $17.8 million, versus a net loss of $7.1 million in the comparable quarter.
Material changes versus the prior comparable period
- Mobile revenue increased 2.0% to $1,489.0 million. Units increased 12.7%, but average selling prices declined 9.5%. Discrete display revenue declined 16.5%, reflecting the shift toward OLED solutions.
- PC revenue increased 10.5% to $229.2 million, driven by a 7.0% increase in units and a 3.2% increase in average selling prices.
- Gross margin declined primarily because of lower-margin TDDI products and technical issues during the ramp of new optical fingerprint products. Management expected later product generations to achieve margins closer to corporate averages.
- Research and development expense decreased 6.1% to $292.3 million, while selling, general and administrative expense decreased 14.9% to $137.6 million, reflecting lower headcount and other cost reductions.
- Fiscal 2017 included $7.3 million of restructuring costs and a $10.0 million litigation settlement charge. Fiscal 2016 included a $6.7 million acquired-intangible impairment charge.
- Operating cash flow decreased because fiscal 2016 benefited substantially from working-capital movements, particularly a $72.0 million reduction in accounts receivable. Fiscal 2017 benefited from a $15.0 million inventory reduction but included a $38.4 million decrease in accounts payable.
- Backlog increased to $221.8 million from $182.8 million, although most orders remained subject to rescheduling or cancellation with limited penalties.
Debt, liquidity and subsequent events
- At June 24, 2017, debt consisted primarily of $220.0 million outstanding under the secured Credit Agreement. The company was in compliance with its debt covenants at fiscal year-end.
- On June 26, 2017, Synaptics issued $525.0 million principal amount of 0.50% convertible senior notes due 2022 and received approximately $514.5 million of net proceeds. It used $220.0 million to repay the Credit Agreement debt.
- The notes are senior unsecured obligations, initially convertible at approximately $73.02 per share, and may result in future share dilution if converted.
- On June 26, 2017, the company repurchased 1,698,400 shares for $93.6 million. The remaining repurchase authorization was $226.1 million as of July 31, 2017.
- Cash flow uses included $31.4 million of capital expenditures, $18.4 million for an equity-method investment and $88.0 million for share repurchases. The company stated that available cash, operating cash flow and borrowing capacity were sufficient for at least the next 12 months.
Guidance, outlook, commentary and risks
The filing does not provide a clear formal numerical revenue or earnings guidance forecast. Management expected continued growth opportunities in smartphones, OLED display-driver products, TDDI, fingerprint authentication, PCs, automotive applications and emerging IoT markets. The company planned to expand into smart-home voice, audio, imaging and multimedia products through the Conexant and Marvell transactions.
Synaptics completed the $305.8 million cash and 726,666-share Conexant acquisition on July 25, 2017. It expected to close the $95 million Marvell multimedia-solutions acquisition in the first quarter of fiscal 2018. These transactions were not reflected in fiscal 2017 operating results.
- Revenue and earnings remain highly dependent on smartphones, PCs and a concentrated group of OEMs and contract manufacturers.
- Rapid technology changes, OLED adoption, price erosion and intense competition could reduce market share, average selling prices and margins.
- The company relies on a limited number of Asian foundries, suppliers and contract manufacturers without long-term capacity or pricing guarantees.
- International operations expose the company to supply-chain disruptions, geopolitical issues, currency movements, trade restrictions and intellectual-property risks.
- Approximately $699.5 million of foreign subsidiary earnings were treated as indefinitely reinvested overseas; the potential deferred U.S. tax liability was estimated at approximately $138.3 million.
- Unrecognized tax benefits totaled $15.2 million, and the IRS was examining fiscal 2014 and 2015 returns.
- The company retained an $8.7 million Validity-related liability pending resolution of matters associated with the Amkor litigation. It also assumed potential environmental liabilities through the Conexant acquisition.
- Fiscal 2017 foreign currency sensitivity analysis indicated that a hypothetical 10% adverse exchange-rate change could reduce pre-tax operating income by approximately $14.0 million, before hedging effects.
Most important facts for investors to verify
- Whether TDDI and new optical fingerprint products achieve margins closer to company averages as production ramps.
- The pace of decline in discrete LCD display-driver revenue and the timing of OLED design wins.
- Customer concentration, particularly the customer representing approximately 24% of fiscal 2017 revenue.
- Post-fiscal-year leverage, liquidity and dilution after the $525.0 million convertible-note issuance, debt repayment, acquisitions and share repurchase.
- The purchase-price allocation, integration costs and revenue contribution from Conexant and the Marvell business.
- Resolution of the Validity/Amkor-related indemnification matter and potential environmental obligations assumed with Conexant.
- Execution against the company’s IoT, smart-home, automotive and other diversification initiatives.