SYNAPTICS Inc annual report, FY2015

Synaptics Incorporated Fiscal 2015 Form 10-K Summary

Reporting period: Fiscal year ended June 27, 2015, a 52-week period. The filing is a fiscal 2015 Form 10-K, not a fiscal 2014 fourth-quarter filing; the June 2015 quarter is the comparable fourth-quarter period disclosed.

Business Context

Synaptics develops custom human-interface semiconductor solutions, including touchscreen, display-driver, fingerprint-authentication, touchpad, and related firmware and software products. Revenue is generated primarily from smartphone, tablet, display, fingerprint, notebook, and other electronic-device markets. The company operates as a single segment and uses a largely outsourced, “virtual manufacturing” model.

  • Mobile product applications represented 84.7% of fiscal 2015 revenue, compared with 72.8% in fiscal 2014.
  • PC product applications represented 15.3% of fiscal 2015 revenue, compared with 27.2% in fiscal 2014.
  • International sales exceeded 86% of revenue. Approximately 79% of sales were to companies in China, Japan, and South Korea that provide design or manufacturing services for OEMs.
  • RSP, acquired October 1, 2014, contributed approximately $715.5 million of fiscal 2015 revenue, or approximately 42% of consolidated revenue.

Financial Performance and Key Metrics

Fiscal year ended June20152014Change
Net revenue$1,703.0 million$947.5 million+79.7%
Gross margin$578.7 million$436.1 million+32.7%
Gross margin percentage34.0%46.0%-1,200 basis points
Operating income$162.2 million$72.5 million+123.7%
Net income$110.4 million$46.7 million+136.4%
Diluted earnings per share$2.84$1.26+125.4%
Cash flow from operations$204.1 million$131.6 million+55.1%
  • Mobile revenue increased 109.1% to $1,442.1 million, primarily due to RSP display-driver products, which contributed $715.5 million.
  • PC revenue increased 1.2% to $260.9 million, primarily due to higher biometric-product unit sales.
  • Research and development expense increased 52.2% to $293.2 million; selling, general, and administrative expense increased 27.9% to $127.9 million.
  • Operating margin was approximately 9.5%, compared with 7.7% in fiscal 2014. Net margin was approximately 6.5%, compared with 4.9%.
  • The fiscal 2015 effective tax rate was approximately 31.1%, compared with approximately 37.3% in fiscal 2014.
  • June 2015 quarter revenue was $478.9 million, gross margin was $167.3 million, operating income was $44.0 million, and net income was $31.3 million.

Liquidity, Cash Flow, Debt, and Capital Allocation

  • Cash and cash equivalents declined to $399.9 million from $447.2 million at fiscal 2014 year-end.
  • Cash flow from operations was $204.1 million. Investing cash outflow was $341.3 million, including $294.3 million for acquisitions and $51.9 million for property and equipment.
  • Financing cash inflow was $93.6 million, including $245.4 million of long-term debt proceeds, partially offset by $121.3 million of share repurchases and $72.2 million of acquisition-related liability payments.
  • Total debt outstanding was approximately $246.3 million at June 30, 2015, consisting of a term loan and revolving-credit borrowings incurred to finance the RSP acquisition. The balance sheet reported $11.3 million of current debt and $231.1 million of long-term debt, net of issuance costs.
  • The credit agreement includes a $150 million term loan and a $150 million revolving facility, with $50 million of revolver availability disclosed in the risk discussion. The company was in compliance with its financial covenants at fiscal year-end.
  • Working capital was $469.3 million, compared with $488.1 million in fiscal 2014.
  • The company repurchased $121.3 million of common stock during fiscal 2015 and paid no cash dividends. The filing states that $198.3 million remained under the repurchase authorization as of July 31, 2015.

Material Changes and Unusual Items

  • The RSP acquisition materially changed the company’s revenue mix, geographic exposure, asset base, debt profile, and foreign-currency exposure. The final purchase price was approximately $468 million, including a $4.8 million adjustment to working-capital consideration.
  • RSP added approximately $240.9 million of acquired intangible assets and $145.2 million of goodwill. Acquired-intangible amortization increased to $87.6 million in cash-flow adjustments and $14.2 million in reported operating expenses; the filing also indicates that some acquired-intangible amortization was included in cost of revenue.
  • Gross margin declined substantially because of acquired-intangible amortization and lower margins on display-driver products.
  • Operating results benefited from an $18.8 million decrease in the fair value of contingent consideration, compared with a $69.9 million increase in fiscal 2014.
  • Fiscal 2015 included a $14.7 million foreign-currency gain primarily related to the RSP acquisition and a $1.3 million unrealized loss on foreign-currency forward contracts.
  • Failed auction-rate securities had a $15.8 million carrying value at fiscal year-end, against $19.1 million of par value, and remained illiquid.
  • Backlog increased to $159.0 million from $132.3 million, primarily reflecting the acquired display-driver business. Most orders could be rescheduled or canceled with limited penalties.

Outlook, Commentary, and Risks

Management cited industry estimates for calendar 2015–2016 growth of approximately 9% for smartphones and 2% for tablets, while notebook units were expected to decline by less than 1%. The company intended to expand its mobile, display-driver, fingerprint, automotive, and other emerging-market offerings while continuing substantial investment in research and development.

  • Customer concentration is significant: four customers each accounted for at least 10% of fiscal 2015 revenue, and one customer represented 18% of total revenue.
  • The company depends on major OEMs and contract manufacturers that generally do not provide firm, long-term volume commitments and may delay, reduce, or cancel orders.
  • Manufacturing relies on a limited number of Asian-based foundries, assemblers, and component suppliers without long-term capacity or pricing guarantees.
  • Competition, rapid technology changes, price erosion, lower-margin product mix, and possible customer adoption of internally developed or competing solutions could pressure revenue and margins.
  • Debt bears variable interest rates; a one-percentage-point increase in rates was estimated to increase annual interest expense by approximately $2.5 million.
  • Potential additional acquisition-related payments included up to $112.0 million for Validity and up to $10.0 million for Pacinian, subject to performance conditions.
  • The RSP indemnification holdback was expected to be settled in the fourth quarter of fiscal 2016. The company excluded RSP from its fiscal 2015 internal-control assessment during the permitted acquisition integration period.
  • Approximately $713.0 million of foreign-subsidiary earnings were considered indefinitely reinvested overseas; the filing estimated a potential deferred tax liability of approximately $116.0 million if repatriated.
  • Synaptics filed patent-infringement actions in April 2015 against Goodix and BLU. The filing does not provide a quantified potential loss.

Investor Verification Checklist

  • Verify the filing period: fiscal 2015 ended June 27, 2015, with June 2015 quarterly results used for the fourth-quarter comparison.
  • Assess how much of revenue and earnings growth was attributable to the RSP acquisition rather than organic growth.
  • Review the sustainability of the 34.0% gross margin given display-driver mix and substantial acquired-intangible amortization.
  • Reconcile cash generation with acquisition spending, capital expenditures, debt repayment, and share repurchases.
  • Monitor leverage, interest coverage, variable-rate exposure, covenant compliance, and the September 2019 debt maturity structure.
  • Evaluate customer and geographic concentration, especially exposure to major customers and Asian contract manufacturers.
  • Review the liquidity and valuation assumptions for auction-rate securities and the tax cost of repatriating foreign earnings.
  • Track Validity and Pacinian contingent consideration, the RSP indemnification holdback, and the pending intellectual-property litigation.