Synaptics Incorporated Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 28, 2015, presented using March 31, 2015 calendar-quarter dates in the financial statements. Comparisons are with the periods ended March 29/31, 2014. The filing was signed May 1, 2015.
Business Context
Synaptics develops and sells semiconductor solutions for human-interface applications in mobile devices, PCs, and other electronics. The company operates as one segment and outsources manufacturing. The October 1, 2014 acquisition of Renesas SP Drivers, Inc. (RSP), a display-driver integrated-circuit business, materially expanded revenue, assets, debt, amortization, and international exposure.
Financial Performance and Position
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Nine months ended March 31, 2015 | Nine months ended March 31, 2014 |
|---|---|---|---|---|
| Net revenue | $477.6 million | $204.3 million | $1,224.0 million | $632.6 million |
| Gross margin | $164.3 million; 34.4% | $92.4 million; 45.2% | $411.4 million; 33.6% | $296.3 million; 46.8% |
| Operating income/(loss) | $51.9 million; 10.9% | $(36.1) million; (17.7%) | $118.1 million; 9.6% | $33.1 million; 5.2% |
| Net income/(loss) | $31.5 million; 6.6% | $(40.1) million; (19.6%) | $79.0 million; 6.5% | $12.2 million; 1.9% |
| Diluted EPS | $0.82 | $(1.12) | $2.04 | $0.33 |
- Mobile revenue was $417.4 million in the quarter, or 87.4% of total revenue, up 176.9% year over year. PC revenue was $60.2 million, up 12.5%.
- RSP contributed $236.7 million of quarterly revenue and $475.3 million of nine-month revenue. Reported revenue growth therefore includes a significant acquisition effect.
- Gross margin declined primarily because of acquired-intangible amortization and lower margins on RSP display-driver products. Acquired-intangible amortization was $20.8 million in the quarter and $68.7 million year to date, including amounts recorded in cost of revenue and operating expenses.
- Research and development expense increased 59.3% year over year in the quarter to $78.7 million; selling, general, and administrative expense increased 38.5% to $35.8 million.
- The change in contingent consideration was a $6.7 million operating benefit in the quarter and an $18.3 million benefit year to date, compared with substantial expense in the prior-year periods, reflecting lower estimated earn-out liabilities.
- Cash and cash equivalents were $380.6 million at March 31, 2015, down from $447.2 million at June 30, 2014. Accounts receivable were $319.6 million and inventories were $152.3 million.
- Operating cash flow was $172.5 million for the nine months, compared with $91.1 million in the prior-year period. Inventory increased by $63.6 million during the period.
- Investing cash flow was a use of $330.2 million, including $294.3 million for the RSP acquisition and $40.9 million for property and equipment.
- Financing cash flow was $94.4 million, including $245.4 million of debt proceeds, $110.6 million of share repurchases, and $63.8 million of acquisition-related liability payments.
- Debt outstanding under the RSP credit facilities was $248.1 million at March 31, 2015, consisting of a $150 million term loan and borrowings under a $150 million revolving facility. The facilities carry variable interest rates.
- Management stated that the company was in compliance with its debt covenants and expected cash, operating cash flow, and available revolver capacity to fund requirements for at least the next 12 months.
Material Changes Versus Prior Comparable Period
- Revenue increased 133.8% in the quarter and 93.5% year to date, driven primarily by the RSP acquisition, higher mobile unit sales, and growth in biometric fingerprint solutions.
- The company shifted from a quarterly loss to profitability, with quarterly operating income of $51.9 million and net income of $31.5 million.
- Despite higher gross profit dollars, gross margin fell 1,080 basis points in the quarter and 1,320 basis points year to date due to RSP product mix and acquisition-related amortization.
- RSP added approximately $364.2 million of assets and represented approximately 39% of nine-month sales. Management excluded RSP from its internal-control assessment during the permitted first year of integration.
- The balance sheet expanded substantially, with total assets increasing to $1.51 billion from $1.02 billion at June 30, 2014, primarily from the RSP acquisition and related goodwill and intangible assets.
- Share repurchases totaled 1.55 million shares and $110.6 million during the nine months, leaving $89.0 million authorized under the repurchase program.
Guidance, Outlook, Risks, and Unusual Items
- The filing cites industry estimates for calendar 2015 smartphone growth of approximately 15%, tablet growth of approximately 5%, and notebook decline of approximately 2%, but states that Synaptics revenue may differ from those trends. No specific company revenue or earnings guidance is provided in the filing text.
- Management expects continued product development, customer adoption, and integration benefits from RSP, but results remain sensitive to product mix, short product life cycles, customer design wins, and demand for mobile devices.
- Contingent consideration may require additional cash payments of up to $122.5 million for Validity and $10.0 million for Pacinian, based on future unit sales through 2016. The recorded fair value of contingent consideration was approximately $55.1 million.
- RSP-related obligations include a $60.6 million Japanese-yen-denominated holdback liability, with indemnification holdback settlement expected in the fourth quarter of fiscal 2016. Foreign-exchange fluctuations could affect results and liabilities.
- Acquired intangible assets totaled $254.4 million net at March 31, 2015, with future amortization disclosed at $254.4 million, including $20.4 million of in-process research and development whose timing was not yet determined.
- Variable-rate debt creates interest-rate exposure; a one-percentage-point increase in rates would increase annual interest expense by approximately $2.5 million.
- The company held $15.6 million of illiquid auction-rate securities, including below-investment-grade investments, that may not be readily accessible without potential loss of principal.
- Approximately $290.2 million of cash was held by foreign subsidiaries and may incur taxes if repatriated.
- The company disclosed potential intellectual-property infringement exposure and, in April 2015, filed patent infringement actions against Goodix and BLU Products. The filing does not quantify potential damages.
- Unrecognized tax benefits were $11.9 million, with $1.1 million of accrued interest and penalties. An IRS audit had concluded without adjustment but remained subject to Joint Committee on Taxation review.
Investor Verification Checklist
- Verify the sustainability of RSP-driven revenue and whether display-driver products can improve from the reported low-margin profile.
- Reconcile reported earnings with acquisition-related intangible amortization, contingent-consideration remeasurement benefits, foreign-exchange gains, and other unusual items.
- Monitor leverage, variable-rate interest expense, debt amortization, and compliance with the 2.50-to-1.0 leverage and 3.50-to-1.0 interest-coverage covenants.
- Assess cash conversion, particularly the increase in inventories and accounts receivable, and the effect of acquisition-related obligations on liquidity.
- Track the Validity and Pacinian earn-outs, the RSP indemnification holdback, and related foreign-currency exposure.
- Evaluate customer concentration: four customers represented 18%, 18%, 18%, and 11% of quarterly revenue, respectively.
- Review integration of RSP controls, as RSP was excluded from management’s internal-control assessment during the first year after acquisition.
- Follow the Goodix and BLU patent litigation, auction-rate securities liquidity, tax matters, and future accounting effects from the new revenue-recognition standard.