Synaptics Incorporated 10-Q Summary
Business context and reporting period
Synaptics develops and sells human-interface solutions for mobile devices, PCs, communications, entertainment, and other electronics. The filing covers the first quarter of fiscal 2014, a 13-week period ended September 28, 2013; the financial statements present amounts as of and for the three months ended September 30, 2013. Comparative results are for the three months ended September 29, 2012, presented as September 30, 2012.
Key financial metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net revenue | $222.6 million | $127.0 million | Up 75.2% |
| Gross margin | $109.3 million; 49.1% | $60.6 million; 47.7% | Up 140 basis points |
| Operating income | $47.2 million; 21.2% | $8.3 million; 6.6% | Up 466.3% |
| Net income | $34.9 million; 15.7% | $6.1 million; 4.8% | Up 477.2% |
| Diluted EPS | $1.00 | $0.18 | Up $0.82 |
| Cash flow from operations | $28.9 million | $29.6 million | Down $0.7 million |
Mobile applications generated $162.7 million, or 73.1% of revenue, versus $64.6 million, or 50.9%, in the prior-year quarter. PC applications generated $59.9 million, down 4.0% year over year. Management attributed mobile growth to higher unit sales, market growth, and market-share gains, while PC revenue reflected continued PC-market weakness.
Operating expenses were $62.1 million, including $40.4 million of research and development and $21.1 million of selling, general, and administrative expense. The effective tax rate was 26.6%, compared with 29.2% in the prior-year quarter.
Balance sheet, liquidity, debt, and cash flow
- Cash and cash equivalents were $331.6 million at September 30, 2013, down from $355.3 million at June 30, 2013.
- Accounts receivable increased to $153.9 million and inventories increased to $57.3 million from $49.9 million. Days sales outstanding increased from 58 to 62 days, while inventory turns declined from 9 to 8.
- Current liabilities were $142.2 million. Notes payable were $2.3 million, and the company had no borrowings under its $75.0 million Wells Fargo working-capital facility, which expires September 1, 2014.
- Operating cash flow was $28.9 million. Investing cash flow used $10.0 million, primarily for property and equipment.
- Financing cash flow used $42.6 million, primarily reflecting $50.0 million spent to repurchase 1,216,904 shares, partly offset by $7.7 million of employee-equity issuance proceeds.
- The company had $109.8 million remaining under its $620.0 million stock-repurchase authorization, which expires in October 2015.
- Approximately $291.4 million of cash was held by foreign subsidiaries and may be subject to additional taxes if repatriated.
Material changes, outlook, risks, and unusual items
- The quarter showed a substantial shift toward mobile products, which generally carried higher margins than the company’s PC-related products. Management expects calendar-year 2013 smartphone and tablet unit shipments to grow approximately 22% and 66%, respectively, while notebook shipments are expected to decline approximately 10%.
- Research and development expense increased 23.3%, primarily due to employee-related costs, additional product-portfolio headcount, and infrastructure costs. SG&A increased 11.7%, including acquisition-related professional fees.
- On October 9, 2013, Synaptics agreed to acquire Validity Sensors, a biometric fingerprint-authentication provider. The base purchase price is $92.5 million, with potential earn-out payments of up to $162.5 million based primarily on product sales through March 31, 2016. Closing was expected in the second quarter of fiscal 2014, subject to customary conditions, with no financing contingency. Approximately $1.0 million of transaction costs was expensed in the quarter.
- Failed auction-rate securities had a fair value of $17.5 million. They are illiquid, include $13.6 million of other-than-temporary impairment recorded in retained earnings, and could require a loss of principal if liquidity is needed before maturity or redemption.
- Synaptics may owe up to $10.0 million of additional contingent consideration related to the Pacinian acquisition, with an estimated fair value liability of $8.5 million at September 30, 2013.
- Gross unrecognized tax benefits were $8.4 million. The company’s IRS examination had been resolved through a revenue agent’s report, but the matter remained pending Joint Committee of Taxation review; future adjustments could materially affect the effective tax rate.
- Key risks include mobile and PC market conditions, customer-product success, customer concentration, dependence on limited suppliers and contract manufacturers, lack of long-term purchase or supply commitments, product-development and acceptance cycles, intellectual-property claims, warranty obligations, and competitive pressures.
- Management stated that existing cash, cash equivalents, and expected operating cash flow should fund working capital and other requirements for at least the next 12 months, including the Validity acquisition.
Important facts for investors to verify
- Whether mobile-market growth and market-share gains continue and offset ongoing PC-market weakness.
- The closing date, purchase-accounting effects, cash funding, and ultimate earn-out exposure from the Validity acquisition.
- The liquidity, valuation assumptions, and potential recovery of the $17.5 million auction-rate securities.
- Inventory growth, declining inventory turns, higher receivables, and related working-capital requirements.
- Future share repurchases and their effect on cash balances, share count, and per-share results.
- The outcome of the pending tax review and any resulting changes to tax expense or unrecognized tax benefits.
- Potential intellectual-property litigation, indemnification, warranty, supplier, and customer-concentration exposures.