Synaptics Incorporated — Fiscal 2021 Second-Quarter 10-Q Summary
Reporting period: Quarter and six months ended December 26, 2020, compared with the comparable periods ended December 28, 2019. Synaptics develops and sells semiconductor solutions for IoT, PC, mobile, wireless connectivity, video, voice and human-interface applications.
Financial Performance and Position
| Metric | Three months ended Dec. 26, 2020 | Prior comparable period | Six months ended Dec. 26, 2020 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $357.6 million | $388.3 million | $686.0 million | $728.2 million |
| Gross margin | $150.4 million; 42.1% | $159.3 million; 41.0% | $284.9 million; 41.5% | $285.5 million; 39.2% |
| Operating income | $58.5 million; 16.4% | $34.5 million; 8.9% | $64.5 million; 9.4% | $37.7 million; 5.2% |
| Net income | $49.6 million; 13.9% | $19.8 million; 5.1% | $46.8 million; 6.8% | $23.8 million; 3.3% |
| Diluted EPS | $1.36 | $0.58 | $1.29 | $0.70 |
- IoT revenue increased 74.3% to $155.1 million in the quarter and 52.4% to $269.5 million for the six-month period, benefiting from the DisplayLink and Broadcom acquisitions.
- PC revenue increased 12.1% to $91.5 million in the quarter and 15.1% to $172.0 million for the six-month period.
- Mobile revenue declined 49.0% to $111.0 million in the quarter and 39.2% to $244.5 million for the six-month period, primarily because of the fiscal 2020 TDDI divestiture, lower unit volumes and unfavorable product mix.
- Quarterly net income included a $34.2 million gain on the sale of audio technology assets. Gross margin also benefited from product mix and cost reductions, partly offset by higher acquired-intangible amortization and $11.9 million of DisplayLink-related inventory fair-value adjustments.
- Operating expenses were $91.9 million in the quarter and $220.4 million for the six months. Six-month selling, general and administrative expense increased 26.8%, primarily from higher stock-based compensation and acquisition-related costs.
Cash Flow, Debt and Liquidity
- Six-month operating cash flow was $77.9 million, down from $120.0 million in the prior period. Cash flow was affected by a $46.9 million increase in accounts receivable and reductions in accrued compensation, income taxes payable and other accrued liabilities.
- Investing cash flow was negative $518.0 million, including $623.0 million for acquisitions, partly offset by $88.0 million of investment maturities and $34.2 million of proceeds from the audio-asset sale.
- Cash and cash equivalents declined to $309.9 million from $763.4 million at June 27, 2020. Short-term investments were $7.0 million, producing cash and short-term investments of approximately $316.9 million.
- Debt consisted of $100.0 million outstanding under the revolving credit facility and convertible notes with a $496.1 million carrying value and $525.0 million principal amount. The notes mature June 15, 2022; the revolver has a $200.0 million commitment and bears a variable interest rate.
- The company reported compliance with its debt covenants and stated that cash, expected operating cash flow and available revolver capacity should meet working-capital, acquisition and debt-service needs for at least the next 12 months.
- Contractual obligations totaled $735.7 million, including $630.3 million of long-term debt principal and interest, $44.4 million of lease payments, $52.9 million of purchase obligations and other commitments, and $8.1 million of transition-tax payments.
Material Changes and Unusual Items
- Synaptics acquired DisplayLink on July 31, 2020 for preliminary consideration of $442.8 million, including $105.0 million of goodwill and $193.0 million of acquired intangible assets. DisplayLink contributed approximately $45.0 million of revenue after closing.
- Synaptics acquired selected Broadcom wireless-connectivity assets on July 23, 2020 for adjusted consideration of $226.6 million, including $102.8 million of goodwill and $123.0 million of acquired intangible assets. The acquired business contributed approximately $39.4 million of revenue after closing.
- The acquisitions increased goodwill to $568.6 million from $360.8 million and acquired intangible assets to $354.6 million from $93.4 million. Future acquired-intangible amortization is substantial, with $354.6 million remaining as of December 26, 2020, excluding amounts to be determined for in-process research and development.
- The company sold limited audio technology assets in December 2020 for $35.0 million of cash and recognized a $34.2 million gain.
- Restructuring costs were $6.2 million for the six-month period, with remaining restructuring 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.
- No shares were repurchased during the quarter. The remaining authorization under the $1.4 billion repurchase program was $177.4 million as of December 26, 2020.
Outlook, Risks and Contingencies
- The filing does not provide a quantified revenue, earnings or margin forecast. Management expects COVID-19-related uncertainty to continue weighing on operations and results in the near term, although it had not experienced significant disruption through the reporting date.
- Key risks include COVID-19 and other health disruptions, semiconductor-market cyclicality, dependence on mobile and PC markets, customer concentration, product-market adoption, reliance on third-party manufacturers and limited-source suppliers, and supply-chain capacity and yield risks.
- Customer concentration remained significant: one customer represented 18% of quarterly revenue and another 13%; two customers represented 17% and 13% of accounts receivable at December 26, 2020.
- Potential intellectual-property infringement claims could result in litigation costs, damages and management distraction. The company also has indemnification obligations whose maximum potential payments cannot be estimated, although historical costs have not been significant.
- Unrecognized tax benefits were $22.1 million, with a possible increase of up to $3.2 million within the next 12 months. Effective tax rates may fluctuate materially.
- Management’s internal-control assessment excluded DisplayLink during its first year of integration. Disclosure controls were deemed effective, while additional controls for DisplayLink were being developed.
- The company identified no material changes to previously disclosed risk factors and stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
Investor Verification Items
- Verify whether IoT growth from the DisplayLink and Broadcom acquisitions offsets continuing mobile revenue declines and acquisition-related amortization.
- Assess the company’s ability to refinance or repay the $525.0 million convertible notes due in June 2022 while maintaining adequate liquidity.
- Monitor cash conversion, accounts receivable growth, acquisition integration costs and the sustainability of operating cash flow.
- Review the preliminary purchase-price allocations, goodwill and intangible-asset valuations for potential measurement-period adjustments or impairment.
- Evaluate the impact of COVID-19, customer concentration, third-party manufacturing dependence and semiconductor supply constraints.
- Confirm the timing and cost of remaining restructuring activities, tax settlements and the use of the remaining share-repurchase authorization.