Synaptics Incorporated — Fiscal 2013 First Quarter 10-Q
Business context and reporting period
Synaptics develops and sells interactive human-interface solutions for electronic devices, serving PC and mobile product markets. The filing covers the 13-week quarter ended September 29, 2012, presented in the financial statements as September 30, 2012, compared with the quarter ended September 24, 2011, presented as September 30, 2011.
Key financial metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net revenue | $127.0 million | $133.4 million | Down 4.8% |
| Gross margin | $60.6 million; 47.7% | $61.3 million; 45.9% | Margin up 180 basis points |
| Operating income | $8.3 million; 6.6% | $16.3 million; 12.2% | Down 49.0% |
| Net income | $6.1 million | $13.0 million | Down 53.5% |
| Diluted EPS | $0.18 | $0.39 | Down $0.21 |
| Operating cash flow | $29.6 million | $31.1 million | Down $1.4 million |
- Revenue was approximately evenly split between PC applications of $62.4 million, or 49.1%, and mobile applications of $64.6 million, or 50.9%.
- Gross margin improved primarily because of a more favorable mobile-product mix, including a shift from lower-margin full sensor modules to higher-margin chip or tail solutions.
- Research and development expense increased 16.2% to $32.8 million, and selling, general and administrative expense increased 13.2% to $18.9 million.
- The effective tax rate was 29.2%, compared with 21.3% in the prior-year quarter. Excluding share-based compensation and its tax benefit, the rates were 27.7% and 22.4%, respectively.
- Cash and cash equivalents were $312.9 million at September 30, 2012, compared with $305.0 million at June 30, 2012. Current assets were $448.1 million and current liabilities were $110.4 million.
- The company had $2.3 million of notes payable and no borrowings under its $50.0 million revolving credit facility. Management stated that available cash and expected operating cash flows should meet requirements for at least the next 12 months.
- Cash used in investing activities was $19.1 million, including $16.1 million of property and equipment purchases and $5.0 million for the VDO acquisition. Cash used in financing activities was $2.6 million, including $2.6 million for share repurchases.
Material changes versus the prior comparable period
- PC revenue declined 9.3%, primarily because of lower unit sales, while mobile revenue was essentially unchanged.
- Despite the revenue decline, gross margin percentage increased 1.8 percentage points; the benefit was more than offset by higher operating expenses.
- Operating income decreased $8.0 million, and net income decreased $7.0 million, largely reflecting increased research and development and SG&A spending.
- Operating expenses included $0.2 million of acquired-intangible amortization and a $0.3 million increase in the fair value of contingent consideration, neither of which was recorded in the prior-year quarter.
- Capital expenditures increased substantially from $3.6 million to $16.1 million, including $11.9 million for buildings and land. The company also acquired the Video Display Operation of Integrated Device Technology for $5.0 million.
- Share repurchases declined from $33.5 million in the prior-year quarter to $2.6 million. The company repurchased 85,141 shares and had $103.6 million remaining under its authorization at quarter-end.
Outlook, commentary, risks, contingencies, and unusual items
- Management cited industry estimates that notebook shipments could increase approximately 10% and mobile smartphone shipments approximately 26% in calendar 2013 versus calendar 2012. These are industry estimates, not explicit company revenue guidance.
- Key operating risks include dependence on PC and mobile markets, customer product success, competitive pressures, lengthy design and acceptance cycles, limited or single-source suppliers, lack of long-term supply commitments, intellectual-property claims, warranty obligations, and execution of new technologies.
- The company held $14.5 million of auction-rate securities. These investments had failed auctions, were not liquid, and were valued using Level 3 discounted cash-flow estimates. Contractual maturities were generally longer than five years, and the company disclosed $14.0 million of other-than-temporary impairment in retained earnings.
- Cash held by foreign subsidiaries totaled $273.9 million. Repatriation for U.S. operations could create additional tax obligations.
- Gross unrecognized tax benefits increased to $23.7 million. An IRS examination proposed a $2.0 million tax deficiency, excluding interest and penalties; the company filed a protest and expects the appeals process to extend into fiscal 2014. The eventual settlement could exceed accrued unrecognized tax benefits and cause effective tax-rate volatility.
- Pacinian contingent consideration was remeasured to $12.2 million at quarter-end, with $0.3 million recognized in expense. The arrangement could require up to $15.0 million of additional payments based on customer acceptance and future shipments.
- The company purchased a new headquarters complex for approximately $11.9 million and subsequently agreed to sell its existing headquarters for approximately $14.2 million, subject to buyer due diligence and other conditions. Closing was expected in late December 2012 or early 2013.
Investor verification priorities
- Verify whether PC demand and unit volumes continued to weaken and whether mobile growth and product mix sustained the improved gross margin.
- Assess whether elevated research and development and SG&A spending is translating into new design wins, revenue growth, and operating leverage.
- Monitor the liquidity and recoverability of the auction-rate securities and the concentration of cash held by foreign subsidiaries.
- Track the IRS appeal, changes in unrecognized tax benefits, and resulting effective tax-rate volatility.
- Evaluate the commercial progress of the Pacinian ThinTouch technology and the VDO acquisition, including potential contingent consideration payments.
- Confirm completion and economics of the headquarters sale, leaseback period, and relocation-related capital requirements.