Business Context and Reporting Period
Synaptics Incorporated develops custom human-interface semiconductor solutions, including touch, display-driver, fingerprint, voice, audio, imaging, video and automotive technologies. The filing is a Form 10-K for the 53-week fiscal year ended June 30, 2018; the request metadata references “2017 Q4,” but the source filing reports fiscal 2018 annual results and quarterly data for the quarter ended June 2018.
Revenue was generated from mobile, PC and IoT applications. Fiscal 2018 included contributions from the Conexant acquisition, completed July 25, 2017, and the Marvell multimedia-solutions acquisition, completed September 8, 2017.
Key Financial Metrics
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Net revenue | $1,630.3 million | $1,718.2 million |
| Gross margin | $480.1 million; 29.4% | $523.6 million; 30.5% |
| Operating income/(loss) | $(61.9) million; (3.8%) | $64.7 million; 3.8% |
| Net income/(loss) | $(124.1) million | $48.8 million |
| Diluted EPS | $(3.63) | $1.37 |
| Cash flow from operations | $145.0 million | $152.9 million |
| Cash and cash equivalents | $301.0 million | $367.8 million |
| Working capital | $455.7 million | $481.6 million |
- Revenue mix: mobile $1,021.0 million, or 62.6%; PC $257.8 million, or 15.8%; and IoT $351.5 million, or 21.6%.
- Research and development expense increased to $363.2 million from $292.3 million. SG&A increased to $154.0 million from $137.6 million.
- Fiscal 2018 included $12.0 million of restructuring costs and $22.2 million of interest expense, including non-cash amortization associated with the convertible notes.
- Accounts receivable increased to $289.1 million from $255.2 million; inventory was broadly unchanged at $131.2 million.
- Total assets were $1,499.8 million and stockholders’ equity was $729.3 million at June 30, 2018.
- Backlog was $267.3 million, up from $221.8 million, although most orders could be rescheduled or canceled with limited penalties.
Material Changes Versus the Prior Comparable Period
- Revenue declined 5.1%, primarily because mobile revenue fell $385.0 million, or 27.4%, as units sold decreased 34.4%; higher average selling prices partially offset the unit decline.
- IoT revenue increased $268.5 million, or 323.5%, principally because of the Conexant and Marvell acquisitions. PC revenue increased 12.5% on 3.8% higher unit volume, partially offset by a 19.0% decline in average selling prices.
- Gross margin declined 110 basis points. The principal pressures were $38.6 million of acquisition-related inventory fair-value adjustments and a $23.6 million increase in acquired-intangible amortization, partially offset by favorable IoT product mix.
- The company moved from operating income of $64.7 million to an operating loss of $61.9 million and from net income of $48.8 million to a net loss of $124.1 million.
- Cash flow from operations declined modestly by $7.9 million. Cash declined $66.8 million after $396.7 million of acquisition spending, $220.0 million of debt repayment, $93.6 million of share repurchases and $34.1 million of capital expenditures.
- The company issued $525.0 million principal amount of 0.50% convertible senior notes due 2022, received $514.5 million of net proceeds, repaid its prior bank debt and ended the year with no borrowings under its revolving credit facility.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide a clear quantitative fiscal 2019 revenue or earnings forecast. Management’s strategy emphasizes expanding IoT, smart-home, voice, audio, video, automotive, OLED display-driver and TDDI opportunities while maintaining mobile and PC customer relationships.
- Management expects existing cash, operating cash flow, available credit and note proceeds to fund working capital and other requirements for at least the next 12 months.
- The company had $450.7 million of convertible notes, net, at June 30, 2018. The notes have a $525.0 million principal amount, mature in June 2022, and have an initial conversion price of approximately $73.02 per share.
- The revolving credit facility provided up to $200.0 million, with no balance outstanding at year-end. It is subject to leverage, interest-coverage, capital-expenditure and other restrictive covenants; the company reported compliance at year-end.
- Contractual obligations totaled $612.4 million, including $535.4 million of long-term debt obligations, $12.0 million of leases, $56.3 million of purchase obligations and $8.7 million retained in connection with the Validity earn-out and Amkor dispute.
- Fiscal 2018 tax expense included a provisional $44.1 million one-time transition-tax charge under the Tax Cuts and Jobs Act. The company had $24.8 million of gross unrecognized tax benefits and an ongoing IRS examination for fiscal years 2014 and 2015.
- Conexant contributed $116.5 million of revenue and approximately $37.0 million of operating loss; Marvell contributed approximately $138.0 million of revenue and $14.1 million of operating loss during their post-acquisition periods.
- In August 2018, the company initiated a restructuring of its mobile fingerprint optical business, estimating costs of $8.0 million to $10.0 million and substantial completion by the end of the second quarter of fiscal 2019.
- Major risks include mobile-market volatility, customer and OEM concentration, intense competition and pricing pressure, reliance on Asian contract manufacturers and single-source components, acquisition integration, intellectual-property litigation, cybersecurity, foreign-exchange exposure and potential dilution or cash requirements from convertible debt.
- One OEM customer represented approximately 26% of fiscal 2018 revenue. Sales to Sanshin Electronics and Sharp represented 15% and 12%, respectively, of revenue.
- International sales represented more than 86% of revenue, and approximately 75% of fiscal 2018 sales were to companies in China, Japan and South Korea that provide design and manufacturing services to OEMs.
Investor Verification Checklist
- Verify the source period: this is a fiscal 2018 annual filing, not a fiscal 2017 fourth-quarter filing.
- Assess whether the sharp decline in mobile revenue and the shift toward acquired IoT revenue are sustainable and whether IoT acquisitions can become profitable.
- Reconcile reported cash generation with acquisition spending, share repurchases, debt issuance and repayment, and the $301.0 million year-end cash balance.
- Review the convertible-note conversion, redemption and cash-settlement provisions, including potential dilution and the June 2022 maturity.
- Evaluate acquisition-related inventory fair-value adjustments, acquired-intangible amortization, goodwill of $372.8 million and future impairment risk.
- Monitor the August 2018 fingerprint-business restructuring, tax transition-tax finalization, unrecognized tax benefits and the IRS examination.
- Review customer concentration, backlog quality, cancellation rights and dependence on contract manufacturers and single-sourced components.