Synaptics Incorporated — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 27, 2021, compared with the periods ended March 28, 2020. The request metadata identifies “2020 Q3,” but the filing is for fiscal 2021 Q3. Financial statements are unaudited.
Business context
Synaptics develops and sells semiconductor solutions for Internet of Things (IoT), personal computing, and mobile applications. The company operates as one segment and uses outsourced manufacturing. July 2020 acquisitions of DisplayLink and certain Broadcom wireless-connectivity assets expanded its IoT portfolio and contributed $78.9 million and $63.8 million of revenue, respectively, through March 27, 2021.
Key financial metrics
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Revenue | $325.8 million | $328.1 million | $1,011.8 million | $1,056.3 million |
| Gross profit | $155.5 million | $135.6 million | $440.4 million | $421.1 million |
| Gross margin | 47.7% | 41.3% | 43.5% | 39.9% |
| Operating income | $31.6 million | $19.0 million | $96.1 million | $56.7 million |
| Net income | $13.8 million | $5.0 million | $60.6 million | $28.8 million |
| Diluted EPS | $0.35 | $0.14 | $1.62 | $0.83 |
| Operating cash flow | Not separately provided | Not separately provided | $214.3 million | $168.3 million |
- Q3 revenue declined 0.7%; nine-month revenue declined 4.2%.
- IoT revenue increased 101.1% in Q3 and 66.6% for the nine-month period; PC revenue increased 24.7% and 18.4%, respectively.
- Mobile revenue decreased 53.9% in Q3 and 43.7% for the nine-month period, reflecting lower unit volumes, lower average selling prices, and the divestiture of part of the TDDI product line.
- Operating income margin was approximately 9.7% in Q3 and 9.5% for the nine-month period, compared with 5.8% and 5.4%, respectively, in the prior comparable periods.
- Share-based compensation expense was $25.1 million in Q3 and $70.0 million for the nine-month period.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $756.2 million at March 27, 2021, compared with $763.4 million at June 27, 2020. Foreign subsidiaries held $257.1 million of cash, cash equivalents, and short-term investments.
- Total current assets were $1.09 billion and total current liabilities were $276.1 million.
- Long-term debt was $394.4 million, convertible notes were $500.9 million net, and total liabilities were $1.25 billion.
- On March 11, 2021, Synaptics issued $400.0 million of 4.0% senior notes due June 2029. Proceeds were used partly to repay $100.0 million outstanding under the revolving credit facility.
- The amended revolving facility was increased to $250.0 million and had no outstanding balance at March 27, 2021. The company reported compliance with its debt covenants.
- The $525.0 million principal amount of 0.50% convertible notes is due June 2022. The notes were recorded at $500.9 million net and had an estimated fair value of approximately $978.1 million.
- Net cash used in investing activities was $517.0 million, primarily reflecting $626.5 million for acquisitions. Net cash provided by financing activities was $294.0 million.
- The company stated that cash, expected operating cash flow, and available revolver capacity should satisfy working capital, acquisition, and debt-service requirements for at least the next 12 months.
Material changes and unusual items
- DisplayLink was acquired for adjusted consideration of $444.0 million, including $105.4 million of goodwill and $193.0 million of identifiable intangible assets.
- The Broadcom wireless-connectivity business was acquired for adjusted consideration of $226.6 million, including $102.8 million of goodwill and $123.0 million of identifiable intangible assets.
- Acquired intangible amortization increased to $84.5 million for the first nine months, compared with $40.4 million in the prior period. Additional future amortization and goodwill create execution and impairment sensitivity.
- Gross margin benefited from product mix and cost reductions, partly offset by $28.9 million of additional acquired-intangible amortization and $26.0 million of DisplayLink inventory fair-value adjustments during the nine-month period.
- Synaptics sold certain audio technology assets in December 2020 for $35.0 million in cash and recognized a $34.2 million gain.
- Restructuring costs were $7.1 million for the nine-month period, with remaining activities expected to be completed by the end of fiscal 2021.
- The company invested $5.0 million in Eta Compute preferred stock in December 2020.
- As of May 3, 2021, $19.4 million principal amount of convertible notes had been submitted for conversion. The filing states that holders became entitled to redeem or convert notes during the quarter ending June 30, 2021.
Outlook, commentary, and risks
The filing does not provide a specific numerical revenue, earnings, or margin forecast. Management was cautiously optimistic that global vaccination programs would moderate the business impact of COVID-19, while noting risks from new variants and continuing uncertainty affecting customers and suppliers.
- Key operating risks include mobile-market volatility, dependence on large customers, industry cyclicality, product acceptance, customer concentration, and reliance on third-party manufacturers and limited-source suppliers.
- Intellectual-property infringement claims could result in substantial litigation costs, damages, and management distraction. The company reports various ordinary-course litigation matters but does not expect them to have a material adverse effect.
- Customer concentration remains significant: three customers represented at least 10% of revenue in some periods, and major customers accounted for substantial portions of accounts receivable.
- Foreign earnings are considered indefinitely reinvested; repatriation of certain foreign cash could result in withholding taxes.
- Unrecognized tax benefits totaled $22.9 million, with a possible increase of up to $3.1 million within the next 12 months.
- Management excluded DisplayLink from its internal-control assessment during the permitted acquisition integration period and was still developing additional controls for the acquired business.
Investor verification points
- Verify the sustainability of IoT growth and whether it offsets continued mobile revenue declines.
- Reconcile reported and adjusted profitability for acquired-intangible amortization, inventory fair-value adjustments, restructuring costs, and share-based compensation.
- Assess the 2022 convertible-note maturity, conversion activity, potential cash settlement, and dilution.
- Review acquisition integration, goodwill and intangible-asset valuation assumptions, and future amortization expense.
- Monitor covenant compliance, leverage, interest expense, and available liquidity after the acquisitions and new senior notes.
- Evaluate customer and supplier concentration, COVID-19 effects, semiconductor capacity constraints, and intellectual-property contingencies.