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SYNA Synaptics

Filed: 6 Feb 20, 5:01pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 28, 2019

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             .

Commission file number 000-49602

 

SYNAPTICS INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

77-0118518

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1251 McKay Drive

San Jose, California 95131

(Address of principal executive offices) (Zip code)

(408) 904-1100

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $.001 per share

SYNA

The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Number of shares of Common Stock outstanding at January 31, 2020: 33,940,408

 

 

 

 


 

SYNAPTICS INCORPORATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 28, 2019

TABLE OF CONTENTS

 

 

 

 

  

 

  

Page

Part I. Financial Information

  

 

 

 

 

 

   

 

Item 1.

   

Condensed Consolidated Financial Statements (Unaudited):

  

3

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets—December 31, 2019 and June 30, 2019

  

3

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income—Three and Six Months Ended December 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended December 31, 2019 and 2018

  

5

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity

 

6

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows—Six Months Ended December 31, 2019 and 2018

  

7

 

 

 

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements

  

8

 

 

 

 

 

 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

24

 

 

 

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

32

 

 

 

 

 

 

Item 4.

  

Controls and Procedures

  

32

 

 

Part II. Other Information

  

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

33

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

33

 

 

 

 

 

 

 

 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

33

 

 

 

 

 

 

Item 6.

  

Exhibits

  

34

 

 

 

 

 

 

 

Signatures

  

35

 

 

 


 

PART I—FINANCIAL INFORMATION

 

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except par value and share amounts)

(unaudited)

 

 

 

December 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

424.8

 

 

$

327.8

 

Accounts receivable, net of allowances of $1.7 at December 31, 2019 and $2.1 at June 30, 2019

 

 

246.4

 

 

 

230.0

 

Inventories

 

 

82.1

 

 

 

158.7

 

Current assets held for sale

 

 

21.0

 

 

 

-

 

Prepaid expenses and other current assets

 

 

16.5

 

 

 

14.6

 

Total current assets

 

 

790.8

 

 

 

731.1

 

Property and equipment at cost, net of accumulated depreciation of $134.2 and $133.1 at

   December 31, 2019 and June 30, 2019, respectively

 

 

87.7

 

 

 

103.0

 

Non-current assets held for sale

 

 

16.1

 

 

 

 

Goodwill

 

 

362.8

 

 

 

372.8

 

Acquired intangibles, net

 

 

115.5

 

 

 

144.8

 

Non-current other assets

 

 

84.3

 

 

 

58.1

 

 

 

$

1,457.2

 

 

$

1,409.8

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

88.9

 

 

$

98.3

 

Accrued compensation

 

 

45.5

 

 

 

30.4

 

Income taxes payable

 

 

17.5

 

 

 

19.1

 

Other accrued liabilities

 

 

87.6

 

 

 

106.1

 

Total current liabilities

 

 

239.5

 

 

 

253.9

 

Convertible notes, net

 

 

477.4

 

 

 

468.3

 

Other long-term liabilities

 

 

49.0

 

 

 

30.3

 

Total liabilities

 

 

765.9

 

 

 

752.5

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

$0.001 par value; 120,000,000 shares authorized, 65,388,813 and 64,283,948 shares

   issued, and 33,898,937 and 33,349,735 shares outstanding, at December 31, 2019

   and June 30, 2019, respectively

 

 

0.1

 

 

 

0.1

 

Additional paid-in capital

 

 

1,294.2

 

 

 

1,266.1

 

Treasury stock: 31,489,876 and 30,934,213 common treasury shares at December 31,

   2019 and June 30, 2019, respectively, at cost

 

 

(1,209.4

)

 

 

(1,192.4

)

Retained earnings

 

 

606.4

 

 

 

583.5

 

Total stockholders' equity

 

 

691.3

 

 

 

657.3

 

 

 

$

1,457.2

 

 

$

1,409.8

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

3


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net revenue

 

$

388.3

 

 

$

425.5

 

 

$

728.2

 

 

$

843.1

 

Cost of revenue

 

 

229.0

 

 

 

275.7

 

 

 

442.7

 

 

 

552.4

 

Gross margin

 

 

159.3

 

 

 

149.8

 

 

 

285.5

 

 

 

290.7

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

77.0

 

 

 

84.2

 

 

 

163.0

 

 

 

174.3

 

Selling, general, and administrative

 

 

31.5

 

 

 

35.6

 

 

 

59.0

 

 

 

69.4

 

Acquired intangibles amortization

 

 

3.0

 

 

 

2.9

 

 

 

5.9

 

 

 

5.8

 

Restructuring costs

 

 

13.3

 

 

 

2.1

 

 

 

19.9

 

 

 

10.4

 

Total operating expenses

 

 

124.8

 

 

 

124.8

 

 

 

247.8

 

 

 

259.9

 

Operating income

 

 

34.5

 

 

 

25.0

 

 

 

37.7

 

 

 

30.8

 

Interest and other expense, net

 

 

(2.3

)

 

 

(4.3

)

 

 

(5.9

)

 

 

(6.2

)

Income/(loss) before provision/(benefit) for income taxes

   and equity investment loss

 

 

32.2

 

 

 

20.7

 

 

 

31.8

 

 

 

24.6

 

Provision/(benefit) for income taxes

 

 

12.0

 

 

 

7.5

 

 

 

7.1

 

 

 

7.2

 

Equity investment loss

 

 

(0.4

)

 

 

(0.4

)

 

 

(0.9

)

 

 

(0.8

)

Net income

 

$

19.8

 

 

$

12.8

 

 

$

23.8

 

 

$

16.6

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.59

 

 

$

0.37

 

 

$

0.72

 

 

$

0.48

 

Diluted

 

$

0.58

 

 

$

0.36

 

 

$

0.70

 

 

$

0.47

 

Shares used in computing net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

33.5

 

 

 

34.5

 

 

 

33.2

 

 

 

34.8

 

Diluted

 

 

34.4

 

 

 

35.1

 

 

 

34.1

 

 

 

35.6

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

4


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

19.8

 

 

$

12.8

 

 

$

23.8

 

 

$

16.6

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized net gain on investment

 

 

 

 

 

 

 

 

 

 

 

(1.5

)

Comprehensive income

 

$

19.8

 

 

$

12.8

 

 

$

23.8

 

 

$

15.1

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

5


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions, except share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury

 

 

Retained

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Earnings

 

 

Equity

 

Balance at June 30, 2019, as reported

 

 

64,283,948

 

 

$

0.1

 

 

$

1,266.1

 

 

$

(1,192.4

)

 

$

583.5

 

 

$

657.3

 

Cumulative effect of changes in accounting

   principles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.9

)

 

$

(0.9

)

Balance at June 30, 2019, as adjusted

 

 

64,283,948

 

 

 

0.1

 

 

 

1,266.1

 

 

 

(1,192.4

)

 

 

582.6

 

 

 

656.4

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.0

 

 

 

4.0

 

Issuance of common stock for share-

   based award compensation plans

 

 

209,110

 

 

 

 

 

 

1.7

 

 

 

 

 

 

 

 

 

1.7

 

Payroll taxes for deferred stock units

 

 

 

 

 

 

 

 

(1.5

)

 

 

 

 

 

 

 

 

(1.5

)

Purchases of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(17.0

)

 

 

 

 

 

(17.0

)

Share-based compensation

 

 

 

 

 

 

 

 

11.2

 

 

 

 

 

 

 

 

 

11.2

 

Balance at September 30, 2019

 

 

64,493,058

 

 

 

0.1

 

 

 

1,277.5

 

 

 

(1,209.4

)

 

 

586.6

 

 

 

654.8

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19.8

 

 

 

19.8

 

Issuance of common stock for share-

   based award compensation plans

 

 

895,755

 

 

 

 

 

 

11.8

 

 

 

 

 

 

 

 

 

11.8

 

Payroll taxes for deferred stock units

 

 

 

 

 

 

 

 

(7.2

)

 

 

 

 

 

 

 

 

(7.2

)

Share-based compensation

 

 

 

 

 

 

 

 

12.1

 

 

 

 

 

 

 

 

 

12.1

 

Balance at December 31, 2019

 

 

65,388,813

 

 

$

0.1

 

 

$

1,294.2

 

 

$

(1,209.4

)

 

$

606.4

 

 

$

691.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury

 

 

Comprehensive

 

 

Retained

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Income

 

 

Earnings

 

 

Equity

 

Balance at June 30, 2018

 

 

62,889,679

 

 

$

0.1

 

 

$

1,195.2

 

 

$

(1,073.9

)

 

$

1.5

 

 

$

606.4

 

 

$

729.3

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.8

 

 

 

3.8

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1.5

)

 

 

 

 

 

(1.5

)

Issuance of common stock for share-

   based award compensation plans

 

 

140,379

 

 

 

 

 

 

2.1

 

 

 

 

 

 

 

 

 

 

 

 

2.1

 

Payroll taxes for deferred stock units

 

 

 

 

 

 

 

 

(0.9

)

 

 

 

 

 

 

 

 

 

 

 

(0.9

)

Purchases of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(39.4

)

 

 

 

 

 

 

 

 

(39.4

)

Share-based compensation

 

 

 

 

 

 

 

 

16.7

 

 

 

 

 

 

 

 

 

 

 

 

16.7

 

Balance at September 30, 2018

 

 

63,030,058

 

 

 

0.1

 

 

 

1,213.1

 

 

 

(1,113.3

)

 

 

 

 

 

610.2

 

 

 

710.1

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12.8

 

 

 

12.8

 

Issuance of common stock for share-

   based award compensation plans

 

 

773,486

 

 

 

 

 

 

9.3

 

 

 

 

 

 

 

 

 

 

 

 

9.3

 

Payroll taxes for deferred stock units

 

 

 

 

 

 

 

 

(6.3

)

 

 

 

 

 

 

 

 

 

 

 

(6.3

)

Purchases of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(37.9

)

 

 

 

 

 

 

 

 

(37.9

)

Share-based compensation

 

 

 

 

 

 

 

 

16.2

 

 

 

 

 

 

 

 

 

 

 

 

16.2

 

Balance at December 31, 2018

 

 

63,803,544

 

 

$

0.1

 

 

$

1,232.3

 

 

$

(1,151.2

)

 

$

 

 

$

623.0

 

 

$

704.2

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

6


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

23.8

 

 

$

16.6

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Share-based compensation costs

 

 

23.3

 

 

 

32.9

 

Depreciation and amortization

 

 

15.3

 

 

 

19.2

 

Acquired intangibles amortization

 

 

29.3

 

 

 

38.0

 

Deferred taxes

 

 

 

 

 

(4.5

)

Amortization of convertible debt discount and issuance costs

 

 

9.1

 

 

 

8.7

 

Amortization of debt issuance costs

 

 

0.2

 

 

 

0.3

 

Impairment recovery on investments

 

 

 

 

 

(2.8

)

Acquired in-process research and development

 

 

3.7

 

 

 

 

Arbitration settlement

 

 

 

 

 

(1.9

)

Equity investment loss

 

 

0.9

 

 

 

0.8

 

Foreign currency remeasurement loss

 

 

(0.3

)

 

 

0.2

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(16.4

)

 

 

(31.7

)

Inventories

 

 

55.6

 

 

 

(14.5

)

Prepaid expenses and other current assets

 

 

(2.5

)

 

 

(17.0

)

Other assets

 

 

0.8

 

 

 

2.6

 

Accounts payable

 

 

(7.4

)

 

 

19.5

 

Accrued compensation

 

 

15.1

 

 

 

(2.2

)

Acquisition-related liabilities

 

 

 

 

 

(6.8

)

Income taxes payable

 

 

(0.5

)

 

 

(0.4

)

Other accrued liabilities

 

 

(30.0

)

 

 

6.5

 

Net cash provided by operating activities

 

 

120.0

 

 

 

63.5

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of in-process research and development

 

 

(2.5

)

 

 

 

Proceeds from sales of investments

 

 

 

 

 

2.8

 

Purchases of property and equipment

 

 

(8.2

)

 

 

(11.2

)

Net cash used in investing activities

 

 

(10.7

)

 

 

(8.4

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Purchases of treasury stock

 

 

(17.0

)

 

 

(77.3

)

Proceeds from issuance of shares

 

 

13.5

 

 

 

11.4

 

Payroll taxes for deferred stock and market stock units

 

 

(8.7

)

 

 

(7.2

)

Net cash used in financing activities

 

 

(12.2

)

 

 

(73.1

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(0.1

)

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

 

97.0

 

 

 

(18.0

)

Cash and cash equivalents at beginning of period

 

 

327.8

 

 

 

301.0

 

Cash and cash equivalents at end of period

 

$

424.8

 

 

$

283.0

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

7.9

 

 

$

14.3

 

Cash refund on taxes

 

$

1.3

 

 

$

5.2

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment in current liabilities

 

$

1.9

 

 

$

2.8

 

 

See accompanying notes to condensed consolidated financial statements (unaudited)

 

7


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, and U.S. generally accepted accounting principles, or U.S. GAAP. Certain information or footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules and regulations. In our opinion, the financial statements include all adjustments, which are of a normal and recurring nature and necessary for the fair presentation of the results of the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future period. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended June 29, 2019.

The consolidated financial statements include our financial statements and those of our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation.

Our fiscal year is the 52- or 53-week period ending on the last Saturday in June. Our fiscal 2020 is a 52-week period ending June 27, 2020, and our fiscal 2019 was a 52-week period ending on June 29, 2019. The fiscal periods presented in this report are 13- and 26-weeks for the three and six months ended December 28, 2019, and December 29, 2018. For simplicity, the accompanying condensed consolidated financial statements have been shown as ending on calendar quarter end dates as of and for all periods presented, unless otherwise indicated.

Effective at the beginning of our first quarter of fiscal 2020, the quarter ended September 30, 2019, we adopted the requirements of Accounting Standards Update, or ASU, 2016-02, Leases, or Topic 842, issued by the Financial Accounting Standards Board, or FASB.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, cost of revenue, inventories, loss on purchase commitments, product warranty, accrued liabilities, share-based compensation costs, provision for income taxes, deferred income tax asset valuation allowances, uncertain tax positions, goodwill, intangible assets, investments and loss contingencies. We base our estimates on historical experience, applicable laws and regulations, and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Foreign Currency Transactions and Foreign Exchange Contracts

The U.S. dollar is our functional and reporting currency.  We remeasure our monetary assets and liabilities not denominated in the functional currency into U.S. dollar equivalents at the rate of exchange in effect on the balance sheet date. We measure and record non-monetary balance sheet accounts at the historical rate in effect at the date of transaction. We remeasure foreign currency expenses at the weighted average exchange rate in the month that the transaction occurred. Our foreign currency transactions and remeasurement gains and losses are included in selling, general, and administrative expenses in the condensed consolidated statements of income and resulted in net losses of $0.4 million and net gains of $0.1 million in the three and six months ended December 31, 2019, respectively, and net losses of $0.2 million and $0.6 million for the three and six months ended December 31, 2018, respectively.

Leases

We determine if a contract is a lease or contains a lease at the inception of the contract and reassess that conclusion if the contract is modified. All leases are assessed for classification as an operating lease or a finance lease. Operating lease right-of-use, or ROU, assets are included in non-current other assets on our condensed consolidated balance sheet. Operating lease liabilities are separated into a current portion, included within accrued liabilities on our condensed consolidated balance sheet, and a non-current portion, included within operating lease liabilities on our condensed consolidated balance sheet. We do not have any finance lease ROU assets or liabilities. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our

8


 

obligation to make lease payments arising from the lease. We do not obtain and control the right to use the identified asset until the lease commencement date.

Our lease liabilities are recognized at the applicable lease commencement date based on the present value of the lease payments required to be paid over the lease term. Because the interest rate implicit in the lease is not readily determinable, we generally use our incremental borrowing rate to discount the lease payments to present value. The estimated incremental borrowing rate is derived from information available at the lease commencement date. We factor in publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. Our ROU assets are also recognized at the applicable lease commencement date. The ROU asset equals the carrying amount of the related lease liability, adjusted for any lease payments made prior to lease commencement and lease incentives provided by the lessor. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable ROU asset or lease liability.

The term of our leases equals the non-cancellable period of the lease, including any rent-free periods provided by the lessor, and also include options to renew or extend the lease (including by not terminating the lease) that we are reasonably certain to exercise. We establish the term of each lease at lease commencement and reassess that term in subsequent periods when one of the triggering events outlined in Topic 842 occurs. Operating lease cost for lease payments is recognized on a straight-line basis over the lease term.

Our lease contracts often include lease and non-lease components. For our leases, we have elected the practical expedient offered by the standard to not separate lease from non-lease components and account for them as a single lease component.

We have elected, for all classes of underlying assets, not to recognize ROU assets and lease liabilities for leases with a term of twelve months or less. Lease cost for short-term leases is recognized on a straight-line basis over the lease term.

Asset Acquisition

We acquired an emerging technology startup company focused on the design of high-speed connectivity products in August 2019. The purchase price primarily included $2.5 million in cash paid at the closing, and up to $6.5 million in contingent consideration which is payable in set amounts upon meeting various milestones on dates from December 2021 through December 2023. As of December 31, 2019, we have accrued $1.3 million of the contingent consideration as that is the portion which is currently estimable and probable. The acquisition was accounted for as an asset purchase and accordingly we expensed $3.7 million of in-process research and development, recorded liabilities of approximately $1.5 million and recorded a long-term deferred tax asset of $0.3 million in the six months ended December 31, 2019.

Divestiture

In December 2019, we entered into an asset purchase agreement with a third party to sell the assets of our LCD Touch Controller and Display Driver Integration product line, or TDDI, for LCD mobile displays. We will retain our automotive TDDI product line and our discrete touch and discrete display driver product lines supporting LCD and OLED for the mobile market. Subject to certain post-closing adjustments and indemnification obligations, the aggregate consideration payable by the buyer will be $120.0 million in cash, the dollar value of specified inventory at a purchase price of standard cost plus 5% in cash, and the assumption of certain liabilities as set forth in the asset purchase agreement. The transaction is expected to close in the fourth quarter of fiscal 2020, subject to satisfaction of certain closing conditions. The assets to be sold under the asset purchase agreement, have a carrying value of approximately $37.1 million as of December 31, 2019, and have been included as $21.0 million of current assets held for sale and $16.1 million of non-current assets held for sale in our condensed consolidated balance sheets.

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2. Impact of Recently Adopted Accounting Pronouncements

On June 30, 2019, we adopted Accounting Standards Codification Topic 842, or ASC 842, Leases, which requires recognition of ROU assets and lease liabilities for most leases on our consolidated balance sheet. We adopted ASC 842 using a modified retrospective transition approach as of the effective date as permitted by ASC 842. As a result, we were not required to adjust our comparative period financial information for effects of the standard or make the new required lease disclosures for the periods before the date of adoption. We elected the package of practical expedients which allows us not to reassess (1) whether existing or expired contracts, as of the adoption date, contain leases, (2) the lease classification for existing leases, and (3) whether existing initial direct costs meet the new definition. We also elected the practical expedient to not separate lease and non-lease components for our leases, and to not recognize ROU assets and liabilities for short-term leases.

The standard had a material impact on our condensed consolidated balance sheet but did not have a significant impact on our condensed consolidated statements of income or cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.

The adoption of this new standard at June 30, 2019, resulted in the following changes:

 

assets increased by $27.8 million, primarily representing the recognition of ROU assets for operating leases; and

 

liabilities increased by $28.4 million, primarily representing the recognition of lease liabilities for operating leases.

3. Revenue Recognition

We adopted Accounting Standards Codification Topic 606, or ASC 606, Revenue from Contracts with Customers, at the beginning of our fiscal 2019. Our revenue is primarily generated from the sale of application specific integrated circuit chips, or ASIC chips, either directly to a customer or to a distributor. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. All of our revenue, except an inconsequential amount, is recognized at a point in time, either on shipment or delivery of the product, depending on customer terms and conditions. We generally warrant our products for a period of 12 months from the date of sale and estimate probable product warranty costs at the time we recognize revenue as the warranty is considered an assurance warranty and not a performance obligation. Non-product revenue is recognized over the same period of time such performance obligations are satisfied. We then select an appropriate method for measuring satisfaction of the performance obligations.

Revenue from sales to distributors is recognized upon shipment of the product to the distributors (sell-in basis). Master sales agreements are in place with certain customers, and these agreements typically contain terms and conditions with respect to payment, delivery, warranty and supply. In the absence of a master sales agreement, we consider a customer's purchase order or our standard terms and conditions to be the contract with the customer.

Our pricing terms are negotiated independently, on a stand-alone basis. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration which we expect to receive for the sale of such products. In limited situations, we make sales to certain customers under arrangements where we grant stock rotation rights, price protection and price allowances; variable consideration associated with these rights is expected to be inconsequential. These adjustments and incentives are accounted for as variable consideration, classified as other current liabilities under the revenue standard, and are shown as customer obligations in Note 9 Other Accrued Liabilities and Other Long-Term Liabilities. We estimate the amount of variable consideration for such arrangements based on the expected value to be provided to customers, and we do not believe that there will be significant changes to our estimates of variable consideration. When incentives, stock rotation rights, price protection, volume discounts, or price allowances are applicable, they are estimated and recorded in the period the related revenue is recognized. Stock rotation reserves are based on historical return rates and recorded as a reduction to revenue with a corresponding reduction to cost of goods sold for the estimated cost of inventory that is expected to be returned and recorded as prepaid expenses and other current assets. In limited circumstances, we enter into volume-based tiered pricing arrangements and we estimate total unit volumes under such arrangements to determine the expected transaction price for the units expected to be transferred. Such arrangements are accounted for as contract liabilities within other accrued liabilities. Sales returns liabilities are recorded as refund liabilities within other accrued liabilities.

Our accounts receivable balance is from contracts with customers and represents our unconditional right to receive consideration from customers. Payments are generally due within three months of completion of the performance obligation and subsequent invoicing and therefore, do not include significant financing components. To date, there have been no material impairment losses on accounts receivable. There were $0.8 million in contract assets recorded on the condensed consolidated balance sheets as of December 31, 2019 and $0.9 million as of June 30, 2019. Contract assets are presented as part of prepaid expenses and other current assets. Contract liabilities and refund liabilities were $5.9 million and $21.4 million, respectively, as of December 31, 2019, and $4.5 million and $47.5 million, respectively, as of June 30, 2019. Both contract liabilities and refund liabilities are presented as part of customer obligations in Note 9 Other Accrued Liabilities and Other Long-Term Liabilities. During the six months ended December 31, 2019,

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and the six months ended December 31, 2018, we recognized $0.3 million in revenue related to contract liabilities, which was outstanding as of the beginning of each such fiscal year.

We invoice customers for each delivery upon shipment and recognize revenue in accordance with delivery terms. As of December 31, 2019, we did 0t have any remaining unsatisfied performance obligations with an original duration greater than one year. Accordingly, under the optional exception provided by ASC 606, we do not disclose revenues allocated to future performance obligations of partially completed contracts. We have elected to account for shipping and handling costs as fulfillment costs before the customer obtains control of the goods. We continue to classify shipping and handling costs as a cost of revenue. We have elected to continue to account for collection of all taxes on a net basis.  

We incur commission expense that is incremental to obtaining contracts with customers. Sales commissions (which are recorded as a selling, general and administrative expense in the condensed consolidated statements of income) are expensed when the product is shipped because such commissions are owed after shipment.

Revenue from contracts with customers disaggregated by geographic area based on customer location and groups of similar products is presented in Note 14 Segment, Customers, and Geographical Information.

 

 

4. Net Income Per Share

The computation of basic and diluted net income per share was as follows (in millions, except per share data):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

19.8

 

 

$

12.8

 

 

$

23.8

 

 

$

16.6

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares, basic

 

 

33.5

 

 

 

34.5

 

 

 

33.2

 

 

 

34.8

 

Effect of dilutive share-based awards

 

 

0.9

 

 

 

0.6

 

 

 

0.9

 

 

 

0.8

 

Shares, diluted

 

 

34.4

 

 

 

35.1

 

 

 

34.1

 

 

 

35.6

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.59

 

 

$

0.37

 

 

$

0.72

 

 

$

0.48

 

Diluted

 

$

0.58

 

 

$

0.36

 

 

$

0.70

 

 

$

0.47

 

 

Our basic net income per share amounts for each period presented have been computed using the weighted average number of shares of common stock outstanding over the period measured. Our diluted net income per share amounts for each period presented include the weighted average effect of potentially dilutive shares. We use the treasury stock method to determine the dilutive effect of our stock options, deferred stock units, or DSUs, market stock units, or MSUs, performance stock units, or PSUs, and our convertible notes.

Dilutive net income per share amounts do not include the potential weighted average effect of 775,347 and 1,736,456 shares of common stock related to certain share-based awards that were outstanding during the three months ended December 31, 2019 and 2018, respectively, and 1,074,778 and 1,426,365 shares of common stock related to certain share-based awards that were outstanding during the six months ended December 31, 2019 and 2018, respectively. These share-based awards were not included in the computation of diluted net income per share because their effect would have been antidilutive.

 

 

5. Fair Value

Our financial assets, measured at fair value on a recurring basis under the fair value hierarchy, consisted of money market funds within level 1 financial assets and totaled $400.9 million and $313.7 million as of December 31, 2019 and June 30, 2019, respectively. These money market funds were included in cash and cash equivalents in our condensed consolidated balance sheets.

The fair values of our accounts receivable and accounts payable approximate their carrying values because of the short-term nature of those instruments. Intangible assets, property and equipment, and goodwill are measured at fair value on a non-recurring basis if impairment is indicated.

 

 

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6. Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value and consisted of the following (in millions):

 

 

 

December 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

Raw materials and work-in-progress

 

$

52.3

 

 

$

110.7

 

Finished goods

 

 

29.8

 

 

 

48.0

 

 

 

$

82.1

 

 

$

158.7

 

 

We record a write-down, if necessary, to reduce the carrying value of inventory to its net realizable value. The effect of these write-downs is to establish a new cost basis in the related inventory, which we do not subsequently write up. We also record a liability and charge to cost of revenue for estimated losses on inventory we are obligated to purchase from our contract manufacturers when such losses become probable from customer delays, order cancellations, or other factors. As of December 31, 2019, we transferred $20.9 million of inventory to current assets held for sale. See Note 1 Basis of presentation under the heading Divestiture included in the condensed consolidated financial statements contained elsewhere in this Report.

 

 

7. Acquired Intangibles and Goodwill

Acquired Intangibles

The following table summarizes the life, the gross carrying value and the related accumulated amortization of our acquired intangible assets as of December 31, 2019 and June 30, 2019 (in millions):

 

 

 

 

 

 

 

December 31, 2019

 

 

June 30, 2019

 

 

 

Weighted Average

Life in Years

 

 

Gross Carrying

Value

 

 

Accumulated

Amortization

 

 

Net Carrying

Value

 

 

Gross Carrying

Value

 

 

Accumulated

Amortization

 

 

Net Carrying

Value

 

Display driver technology

 

 

5.3

 

 

$

164.0

 

 

$

(156.7

)

 

$

7.3

 

 

$

164.0

 

 

$

(148.1

)

 

$

15.9

 

Audio and video

   technology

 

 

5.3

 

 

 

138.6

 

 

 

(62.9

)

 

 

75.7

 

 

 

138.6

 

 

 

(49.4

)

 

 

89.2

 

Customer relationships

 

 

4.1

 

 

 

81.8

 

 

 

(55.7

)

 

 

26.1

 

 

 

81.8

 

 

 

(49.9

)

 

 

31.9

 

Fingerprint authentication

   technology

 

Not

applicable

 

 

 

 

 

 

 

 

 

 

 

 

47.2

 

 

 

(47.2

)

 

 

 

Licensed technology

   and other

 

 

4.2

 

 

 

7.7

 

 

 

(4.6

)

 

 

3.1

 

 

 

7.7

 

 

 

(3.6

)

 

 

4.1

 

Patents

 

 

8.1

 

 

 

4.4

 

 

 

(2.3

)

 

 

2.1

 

 

 

4.4

 

 

 

(2.0

)

 

 

2.4

 

Tradename

 

 

7.0

 

 

 

1.8

 

 

 

(0.6

)

 

 

1.2

 

 

 

1.8

 

 

 

(0.5

)

 

 

1.3

 

Acquired intangibles,

   gross

 

 

3.1

 

 

$

398.3

 

 

$

(282.8

)

 

$

115.5

 

 

$

445.5

 

 

$

(300.7

)

 

$

144.8

 

 

The total amortization expense for the acquired intangible assets was $11.1 million and $18.0 million for the three months ended December 31, 2019 and 2018, respectively, and $29.3 million and $38.0 million for the six months ended December 31, 2019 and 2018, respectively. During the three months ended December 31, 2019 and 2018, $8.2 million and $15.1 million, respectively, and $23.5 million and $32.1 million for the six months ended December 31, 2019 and 2018, respectively, of amortization expense was included in our condensed consolidated statements of income in cost of revenue; the remainder was included in acquired intangibles amortization.

The following table presents expected annual fiscal year aggregate amortization expense as of December 31, 2019 (in millions):

 

Remainder of 2020

 

$

22.1

 

2021

 

 

37.5

 

2022

 

 

32.9

 

2023

 

 

20.4

 

2024

 

 

2.5

 

2025

 

 

0.1

 

Future amortization

 

$

115.5

 

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Goodwill

Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired.  There was 0 change in goodwill during the six months ended December 31, 2019.  

 

 

8. Leases

Our leases mainly include our worldwide office and research and development facilities which are all classified as operating leases. Certain leases include renewal options that are under our discretion. The leases expire at various dates through fiscal year 2026, some of which include options to extend the lease for up to 5 years. For the six months ended December 31, 2019, we recorded approximately $4.7 million of operating leases expense. Our short-term leases are immaterial and we do not have finance leases.

As of December 31, 2019, the components of leases and lease costs are as follows (in millions):

 

 

 

December 31,

 

 

 

2019

 

Operating lease right-of-use assets

 

$

24.8

 

Operating lease liabilities

 

$

8.3

 

Operating lease liabilities, long-term

 

 

16.8

 

Total operating lease liabilities

 

$

25.1

 

 

Supplemental cash flow information related to leases is as follows (in millions):

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2019

 

Cash paid for operating leases included in operating

   cash flows

 

$

4.7

 

Supplemental non-cash information related to lease

   liabilities arising from obtaining right-of-use assets

 

 

1.5

 

As of December 31, 2019, the weighted average remaining lease term is 3.8 years, and the weighted average discount rate is 4.21%.  

Future minimum lease payments for the operating lease liabilities are as follows (in millions):

 

 

 

Operating

 

 

 

Lease

 

Fiscal Year

 

Payments

 

Remainder of 2020

 

$

4.7

 

2021

 

 

8.6

 

2022

 

 

5.8

 

2023

 

 

3.7

 

2024

 

 

2.5

 

Thereafter

 

 

1.8

 

Total future minimum operating lease payments

 

 

27.1

 

Less: interest

 

 

(2.0

)

Total lease liabilities

 

$

25.1

 

 

13


 

As of the beginning of our fiscal quarter ended September 30, 2019, our aggregate minimum rental commitments for future fiscal years for non-cancelable operating leases with initial or remaining terms in excess of one year were as follows (in millions):

 

 

 

Operating

 

 

 

Lease

 

Fiscal Year

 

Payments

 

2020

 

$

7.4

 

2021

 

 

3.2

 

2022

 

 

0.9

 

2023

 

 

0.3

 

2024

 

 

0.1

 

Total future minimum operating lease payments

 

$

11.9

 

 

 

9. Other Accrued Liabilities and Other Long-Term Liabilities

Other accrued liabilities consisted of the following (in millions):

 

 

 

December 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

Customer Obligations

 

$

27.3

 

 

$

52.0

 

Inventory obligations

 

 

27.1

 

 

 

26.7

 

Operating lease liabilities

 

 

8.3

 

 

 

 

Warranty

 

 

4.0

 

 

 

4.0

 

Other

 

 

20.9

 

 

 

23.4

 

 

 

$

87.6

 

 

$

106.1

 

 

Other long-term liabilities consisted of the following (in millions):

 

 

 

December 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

Income taxes payable, long-term

 

$

17.1

 

 

$

16.2

 

Operating lease liabilities, long-term

 

 

16.8

 

 

 

 

Other

 

 

15.1

 

 

 

14.1

 

 

 

$

49.0

 

 

$

30.3

 

 

 

10. Indemnifications and Contingencies

Indemnifications

In connection with certain agreements, we are obligated to indemnify the counterparty against third party claims alleging infringement of certain intellectual property rights by us. We have also entered into indemnification agreements with our officers and directors. Maximum potential future payments under these agreements cannot be estimated because these agreements generally do not have a maximum stated liability. However, historical costs related to these indemnification provisions have not been significant. We have not recorded any liability in our condensed consolidated financial statements for such indemnification obligations.

Contingencies

We have in the past, and may in the future, receive notices from third parties that claim our products infringe their intellectual property rights. We cannot be certain that our technologies and products do not and will not infringe issued patents or other proprietary rights of third parties.

Any infringement claims, with or without merit, could result in significant litigation costs and diversion of management and financial resources, including the payment of damages, which could have a material adverse effect on our business, financial condition, and results of operations.

 

 

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11. Debt

Convertible Debt

Our convertible debt consists of an original $525 million aggregate principal amount of 0.50% convertible senior notes due 2022, or the Notes, which were issued in a private placement transaction. The net proceeds from the Notes, after deducting discounts, were $514.5 million.

The Notes bear interest at a rate of 0.50% per year, which is payable semi-annually in arrears, on June 15 and December 15 of each year. The Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any our liabilities that are not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

The Notes mature on June 15, 2022, or the Maturity Date, unless earlier repurchased, redeemed or converted.

Holders may convert all or any portion of their Notes, in multiples of $1,000 principal amounts, at their option at any time prior to the close of business on the business day immediately preceding March 15, 2022 under certain defined circumstances.

On or after March 15, 2022 until the close of business on the business day immediately preceding the Maturity Date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amounts, at the option of the holder. Upon conversion, we will pay or deliver, at our election, shares of common stock, cash, or a combination of cash and shares of common stock.

The conversion rate for the Notes is initially 13.6947 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $73.02 per share of common stock). The conversion rate is subject to adjustment in certain circumstances.

Upon the occurrence of a fundamental change (as defined in the Notes indenture), holders of the Notes may require us to repurchase for cash all or a portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the fundamental change repurchase date.

We may not redeem the Notes prior to June 20, 2020. We may redeem for cash all or any portion of the Notes, at our option, on or after June 20, 2020, if the last reported sale price of our common stock, as determined by us, has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest up to, but excluding, the redemption date. Our policy is to settle the principal amount of our Notes with cash upon conversion or redemption.

As of the issuance date of the Notes, we recorded $82.1 million of the principal amount to equity, representing the debt discount for the difference between our estimated nonconvertible debt borrowing rate of 4.39% and the coupon rate of the Notes of 0.50% using a five-year life, which coincides with the term of the Notes. In addition, we allocated the total of $11.1 million of debt issuance costs, consisting of the initial purchaser’s discount of $10.5 million and legal, accounting, and printing costs of $579,000, pro rata, to the equity and debt components of the Notes, or $1.9 million and $9.2 million, respectively. The debt discount and the debt issuance costs allocated to the debt component of the Notes are amortized as interest expense using the effective interest method over five years.

The contractual interest expense and amortization of discount on the Notes for the six months ended December 31, 2019, were as follows (in millions):

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2019

 

Interest expense

 

$

1.3

 

Amortization of discount and debt issuance costs

 

 

9.1

 

Total interest

 

$

10.4

 

 

15


 

The unamortized amounts of the debt issuance costs and discount associated with the Notes as of December 31, 2019, were $4.8 million and $42.8 million, respectively.

 

Revolving Credit Facility

In September 2017, we entered into an Amendment and Restatement Agreement, or the Agreement, with the lenders that are party thereto, or the Lenders, and Wells Fargo Bank, National Association, as administrative agent for the Lenders. The Agreement terminated our prior term loan arrangement and provides for a revolving credit facility in a principal amount of up to $200 million, which includes a $20 million sublimit for letters of credit and a $20 million sublimit for swingline loans. Under the terms of the Agreement, we may, subject to the satisfaction of certain conditions, request increases in the revolving credit facility commitments in an aggregate principal amount of up to $100 million to the extent existing or new lenders agree to provide such increased or additional commitments, as applicable.  Proceeds under the revolving credit facility are available for working capital and general corporate purposes. As of December 31, 2019, there was 0 balance outstanding under the revolving credit facility.

The revolving credit facility is required to be repaid in full on the earlier of (i) September 27, 2022, and (ii) the date 91 days prior to the Maturity Date of the Notes if the Notes have not been refinanced in full by such date. Debt issuance costs of $2.3 million relating to the revolving credit facility will be amortized over 60 months.

Our obligations under the Agreement are guaranteed by the material domestic subsidiaries of our Company, subject to certain exceptions (such material subsidiaries, together with our Company, collectively, the Credit Parties). The obligations of the Credit Parties under the Agreement and the other loan documents delivered in connection therewith are secured by a first priority security interest in substantially all of the existing and future personal property of the Credit Parties, including, without limitation, 65% of the voting capital stock of certain of the Credit Parties’ direct foreign subsidiaries, subject to certain exceptions.

The revolving credit facility bears interest at our election of a Base Rate plus an Applicable Margin or LIBOR plus an Applicable Margin. Swingline loans bear interest at a Base Rate plus an Applicable Margin. The Base Rate is a floating rate that is the greater of the Prime Rate, the Federal Funds Rate plus 50 basis points, or LIBOR plus 100 basis points. The Applicable Margin is based on a sliding scale which ranges from 0.25 to 100 basis points for Base Rate loans and 100 basis points to 175 basis points for LIBOR loans. We are required to pay a commitment fee on any unused commitments under the Agreement which is determined on a leverage-based sliding scale ranging from 0.175% to 0.25% per annum. Interest and fees are payable on a quarterly basis. The LIBOR index is expected to be discontinued at the end of 2021. Under our credit facility, when the LIBOR index is discontinued, we will switch to a comparable or successor rate as approved by the Administrative Agent, which is currently anticipated to be the Secured Overnight Financing Rate, or SOFR.

Under the Agreement, there are various restrictive covenants, including three financial covenants which limit the consolidated total leverage ratio, or leverage ratio, the consolidated interest coverage ratio, or interest coverage ratio, a restriction which places a limit on the amount of capital expenditures that may be made in any fiscal year, a restriction that permits up to $50 million per fiscal quarter of accounts receivable financings, and sets the Specified Leverage Ratio. The leverage ratio is the ratio of debt as of the measurement date to earnings before interest, taxes, depreciation and amortization, or EBITDA, for the four consecutive quarters ending with the quarter of measurement. The current leverage ratio shall not exceed 3.50 to 1.00 provided that for the four fiscal quarters ending after the date of a material acquisition, such maximum leverage ratio shall be adjusted to 3.75 to 1.00, and thereafter, shall not be more than 3.50 to 1.00. The interest coverage ratio is EBITDA to interest expense for the four consecutive quarters ending with the quarter of measurement. The interest coverage ratio must not be less than 3.50 to 1.0 during the term of the Agreement. The Specified Leverage Ratio is the ratio used in determining, among other things, whether we are permitted to make dividends and/or prepay certain indebtedness, at a fixed ratio of 3.00 to 1.00. As of the end of the fiscal quarter, we were in compliance with the restrictive covenants.

 

 

16


 

12. Share-Based Compensation

Share-based compensation and the related tax benefit recognized in our condensed consolidated statements of income were as follows (in millions):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Cost of revenue

 

$

0.6

 

 

$

0.8

 

 

$

1.3

 

 

$

1.7

 

Research and development

 

 

8.1

 

 

 

8.5

 

 

 

15.6

 

 

 

16.8

 

Selling, general, and administrative

 

 

6.4

 

 

 

6.9

 

 

 

9.4

 

 

 

14.4

 

Total

 

$

15.1

 

 

$

16.2

 

 

$

26.3

 

 

$

32.9

 

Income tax expense/(benefit) on share-based compensation

 

$

(1.8

)

 

$

0.3

 

 

$

(2.7

)

 

$

(2.4

)

 

Included in the preceding table is share-based compensation for our cash-settled phantom stock units, which we granted in October 2019 (see Phantom Stock Units below) (in millions):

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2019

 

Cost of revenue

 

$

0.1

 

Research and development

 

 

2.5

 

Selling, general, and administrative

 

 

0.4

 

Total

 

$

3.0

 

 

Historically, we have issued new shares in connection with our equity-settled share-based compensation plans, however, treasury shares are also available for issuance. Any additional shares repurchased under our common stock repurchase program will be available for issuance under our share-based compensation plans.

New Share-Based Compensation Plans

On October 29, 2019, our stockholders approved: (i) our 2019 Equity and Incentive Compensation Plan, or the 2019 Incentive Plan, to replace our Amended and Restated 2010 Incentive Compensation Plan, and (ii) our 2019 Employee Stock Purchase Plan, or the 2019 ESPP, to replace our Amended and Restated 2010 Employee Stock Purchase Plan. Upon approval of the 2019 Incentive Plan, new awards are no longer issued under the replaced share-based compensation plan. Awards outstanding at October 29, 2019 under our prior share-based compensation plans were not impacted by the approval of the 2019 Incentive Plan and continue to remain outstanding by their terms under the applicable share-based compensation plan.

The 2019 Incentive Plan authorizes our board of directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, cash incentive awards, performance shares, performance units, and other stock-based awards.  The number of shares approved by stockholders under the 2019 Incentive Plan was 1,230,000. The 2019 ESPP authorizes the company to provide eligible employees with an opportunity to acquire an equity interest in the company through the purchase of stock at a discount, with an initial authorization of 1,500,000 shares.

Effective August 19, 2019, we adopted the 2019 Inducement Equity Plan. 650,000 shares of our common stock have been reserved for issuance under the 2019 Inducement Equity Plan, subject to adjustment for stock dividends, stock splits, or other changes in our common stock or capital structure. The 2019 Inducement Equity Plan is intended to comply with Rule 5635(c)(4) of the Nasdaq Stock Market Listing Rules, which provide an exception to the Nasdaq Stock Market Listing Rules’ on the shareholder approval requirement for the issuance of securities with regards to grants to employees of the Company or its subsidiaries as an inducement material to such individuals entering into employment with the Company or its subsidiaries. An individual is eligible to receive an award under the 2019 Inducement Equity Plan only if he or she was not previously an employee or director of our company (or is returning to work after a bona-fide period of non-employment), and an award under the 2019 Inducement Equity Plan is a material inducement for him or her to accept employment with our company.

 

17


 

Stock Options

Stock option activity was as follows:

 

 

 

Stock

 

 

Weighted

 

 

Aggregate

 

 

 

Option

 

 

Average

 

 

Intrinsic

 

 

 

Awards

 

 

Exercise

 

 

Value

 

 

 

Outstanding

 

 

Price

 

 

(in millions)

 

Balance as of June 30, 2019

 

 

1,191,929

 

 

$

59.07

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(180,278

)

 

 

34.43

 

 

 

 

 

Forfeited

 

 

(99,108

)

 

 

69.18

 

 

 

 

 

Balance as of December 31, 2019

 

 

912,543

 

 

 

62.84

 

 

$

8.7

 

Exercisable at December 31, 2019

 

 

906,030

 

 

 

62.93

 

 

$

8.6

 

 

The aggregate intrinsic value was determined using the closing price of our common stock on December 27, 2019 of $66.89 and excludes the impact of stock options that were not in-the-money.

Deferred Stock Units

DSU activity was as follows:

 

 

 

 

 

 

 

Aggregate

 

 

 

DSU

 

 

Intrinsic

 

 

 

Awards

 

 

Value

 

 

 

Outstanding

 

 

(in millions)

 

Balance as of June 30, 2019

 

 

1,878,853

 

 

 

 

 

Granted

 

 

600,711

 

 

 

 

 

Delivered

 

 

(780,121

)

 

 

 

 

Forfeited

 

 

(225,320

)

 

 

 

 

Balance as of December 31, 2019

 

 

1,474,123

 

 

$

98.6

 

 

The aggregate intrinsic value was determined using the closing price of our common stock on December 27, 2019 of $66.89.

Of the shares delivered, 184,466 shares valued at $7.4 million were withheld to meet statutory tax withholding requirements.

Market Stock Units

Our 2019 Incentive Plan and our Amended and Restated 2010 Incentive Compensation Plans provide for the grant of MSU awards to our employees, consultants, and directors, and our 2019 Inducement Equity Plan provides for the grant of MSU awards to certain of our employees. An MSU is a promise to deliver shares of our common stock at a future date based on the achievement of market-based performance requirements in accordance with the terms of the MSU grant agreement.

We have granted MSUs to our executive officers and other management members under our Amended and Restated 2010 Incentive Compensation Plan, our 2019 Incentive Plan and our 2019 Inducement Equity Plan, which are designed to vest in three or four tranches with the target quantity for each tranche equal to one-third or one-fourth of the total MSU grant. The first tranche vests based on a one-year performance period; the second tranche vests based on a two-year performance period; the third tranche vests based on a three-year performance period; and the fourth tranche (in the case of four-year vesting) vests based on a four-year performance period. Performance is measured based on the achievement of a specified level of total stockholder return, or TSR, relative to the TSR of the S&P Semiconductor Select Industry Index, or SPSISC Index, for grants made beginning in fiscal 2018, and relative to the Philadelphia Semiconductor Index, or SOX Index, for grants made prior to fiscal 2018. The potential payout ranges from 0% to 200% of the target grant quantity and is adjusted on a two-to-one ratio based on our TSR performance relative to the SPSISC Index TSR or SOX Index TSR using the following formula:

(100% + ([Synaptics TSR — {SPSISC Index TSR or SOX Index TSR}] x 2))

18


 

For MSUs vesting over three years, the payout for the first tranche and the second tranche will not exceed 100% and the payout for the third tranche will be calculated based on the total target quantity for the entire grant multiplied by the payout factor, based on performance for the three-year performance period, less shares issued for the first tranche and the second tranche. For MSUs vesting over four years, the payout for the first tranche, the second tranche and the third tranche will not exceed 100% and the payout for the fourth tranche will be calculated based on the total target quantity for the entire grant multiplied by the payout factor, based on performance for the four-year performance period, less shares issued for the first tranche, the second tranche and the third tranche.

Delivery of shares earned, if any, will take place on the dates provided in the applicable MSU grant agreement, assuming the grantee is still an employee, consultant, or director of our company at the end of the applicable performance period. On the delivery date, we withhold shares to cover statutory tax withholding requirements and deliver a net quantity of shares to the employee, consultant, or director after such withholding. Until delivery of shares, the grantee has no rights as a stockholder with respect to any shares underlying the MSU award.

MSU activity was as follows:

 

 

 

 

 

 

 

Aggregate

 

 

 

MSU

 

 

Intrinsic

 

 

 

Awards

 

 

Value

 

 

 

Outstanding

 

 

(in millions)

 

Balance as of June 30, 2019

 

 

210,732

 

 

 

 

 

Granted

 

 

328,599

 

 

 

 

 

Performance adjustment

 

 

(58,707

)

 

 

 

 

Delivered

 

 

(23,018

)

 

 

 

 

Forfeited

 

 

(54,774

)

 

 

 

 

Balance as of December 31, 2019

 

 

402,832

 

 

$

26.9

 

 

The aggregate intrinsic value was determined using the closing price of our common stock on December 27, 2019 of $66.89.  

We value MSUs using the Monte Carlo simulation model on the date of grant and amortize the compensation expense over the three- or four-year performance and service period on a straight-line basis. The unrecognized share-based compensation cost of our outstanding MSUs was approximately $19.4 million as of December 31, 2019, which will be recognized over a weighted average period of approximately 1.8 years.

Performance Stock Units

Our 2019 Incentive Plan and our Amended and Restated 2010 Incentive Compensation Plan provide for the grant of PSU awards to our employees, consultants, and directors. A PSU is a promise to deliver shares of our common stock at a future date based on the achievement of performance-based requirements in accordance with the terms of the PSU grant agreement.

We have granted PSUs to our executive officers and other management members under our Amended and Restated 2010 Incentive Compensation Plan, our 2019 Incentive Plan and our 2019 Inducement Equity Plan, which are designed to vest in three tranches with the target quantity for each tranche equal to one-third of the total PSU grant. The grants have a specific one-year performance period and vesting occurs over three service periods with the final service period ending approximately three years from the grant date. Performance is measured based on the achievement of a specified level of non-GAAP earnings per share. The potential payout ranges from 0% to 200% of the target grant quantity and is adjusted on a linear basis with a payout triggering if our non-GAAP earnings per share equals greater than 65% of the target with a maximum payout achieved at 135% of target.

Delivery of shares earned, if any, will take place on the dates provided in the applicable PSU grant agreement, assuming the grantee is still an employee, consultant, or director of our company at the end of the applicable service period. On the delivery date, we withhold shares to cover statutory tax withholding requirements and deliver a net quantity of shares to the employee, consultant, or director after such withholding. Until delivery of shares, the grantee has no rights as a stockholder with respect to any shares underlying the PSU award.

19


 

PSU activity was as follows:

 

 

 

 

 

 

 

Aggregate

 

 

 

PSU

 

 

Intrinsic

 

 

 

Awards

 

 

Value

 

 

 

Outstanding

 

 

(in millions)

 

Balance as of June 30, 2019

 

 

192,618

 

 

 

 

 

Awarded

 

 

328,023

 

 

 

 

 

Performance adjustment

 

 

(10,242

)

 

 

 

 

Released

 

 

(61,668

)

 

 

 

 

Forfeited

 

 

(70,441

)

 

 

 

 

Balance as of December 31, 2019

 

 

378,290

 

 

$

25.3

 

 

The aggregate intrinsic value was determined using the closing price of our common stock on December 27, 2019 of $66.89.

We value PSUs using the aggregate intrinsic value on the date of grant adjusted for estimated performance achievement during the performance period and amortize the compensation expense over the three-year service period on a ratable basis. The unrecognized share-based compensation cost of our outstanding PSUs was approximately $21.0 million as of December 31, 2019, which will be recognized over a weighted average period of approximately 1.7 years.

Phantom Stock Units

The 2019 Incentive Plan authorizes the grant of phantom stock units to non-employee directors, officers and employees. We initially granted phantom stock units in October 2019.  Phantom stock units are cash-settled and entitle the recipient to receive a cash payment equal to the value of a single share for each unit based on the average closing share price of our stock over the thirty calendar days prior to the vesting date. Grants of phantom stock units vest over three years, with an annual vesting date of October 31 each year subsequent to the grant date. We recognize compensation expense for phantom stock units on a straight-line basis for each tranche of each award based on the average closing price of our common stock over the thirty calendar days ended prior to each balance sheet date.  The outstanding phantom stock units had a fair value of $62.02 per unit at December 31, 2019 and our accrued liability for such units was $3.0 million.

Phantom stock activity was as follows:

 

 

 

 

 

 

 

Aggregate

 

 

 

Phantom

 

 

Intrinsic

 

 

 

Stock Units

 

 

Value

 

 

 

Outstanding

 

 

(in millions)

 

Granted

 

 

953,305

 

 

 

 

 

Forfeited

 

 

(45,496

)

 

 

 

 

Balance as of December 31, 2019

 

 

907,809

 

 

$

60.7

 

 

The aggregate intrinsic value was determined using the closing price of our common stock on December 27, 2019 of $66.89.

The unrecognized share-based compensation cost of our outstanding phantom stock units was approximately $53.3 million as of December 31, 2019, which will be recognized over a weighted average period of approximately 2.8 years.

Employee Stock Purchase Plan

Shares purchased, weighted average purchase price, cash received, and the aggregate intrinsic value for employee stock purchase plan purchases during the six months ended December 31, 2019 were as follows (in millions, except for shares purchased and weighted average price):

 

Shares purchased

 

 

275,473

 

Weighted average purchase price

 

$

25.86

 

Cash received

 

$

7.1

 

Aggregate intrinsic value

 

$

9.5

 

 

20


 

13. Income Taxes

We account for income taxes under the asset and liability method. The provision for income taxes recorded in interim periods is recorded by applying the estimated annual effective tax rate to year-to-date income before provision for income taxes, excluding the effects of significant unusual or infrequently occurring discrete items. The tax effects of discrete items are recorded in the same period that the related discrete items are reported and results in a difference between the actual effective tax rate and the estimated annual effective tax rate.

The provision for income taxes of $12.0 million and $7.5 million for the three months ended December 31, 2019 and 2018, respectively, represented estimated federal, foreign, and state income taxes. The effective tax rate for the three months ended December 31, 2019 diverged from the combined U.S. federal and state statutory tax rate primarily because of foreign withholding taxes and global intangible low-taxed income, or GILTI, partially offset by the benefit of research credits, foreign tax credits and income taxed at lower tax rates. The effective tax rate for the three months ended December 31, 2018, diverged from the combined U.S. federal and state statutory tax rate, primarily because of foreign withholding taxes, nondeductible amortization, the impact of net shortfalls in share-based compensation deductions and GILTI, partially offset by the benefit of research credits, foreign tax credits, foreign-derived intangible income deduction, release of reserves related to uncertain tax positions and foreign income taxed at lower tax rates.

The provision for income taxes of $7.1 million and $7.2 million for the six months ended December 31, 2019 and 2018, respectively, represented estimated federal, foreign, and state income taxes. The effective tax rate for the six months ended December 31, 2019 diverged from the combined U.S. federal and state statutory tax rate primarily because of foreign withholding taxes and GILTI, partially offset by the benefit of research credits, foreign tax credits and foreign income taxed at lower tax rates. The effective tax rate for the six months ended December 31, 2018, diverged from the combined U.S. federal and state statutory tax rate, primarily due to foreign withholding taxes, nondeductible amortization, the impact of net shortfalls in share-based compensation deductions and GILTI, partially offset by the benefit of research credits, foreign tax credits, foreign-derived intangible income deduction, excess share-based compensation deductions, release of reserves related to uncertain tax positions and foreign income taxed at lower tax rates.

The total liability for gross unrecognized tax benefits related to uncertain tax positions increased $1.9 million during the six months ended December 31, 2019, to $20.8 million from $18.9 million at June 30, 2019, and was included in other long-term liabilities on our condensed consolidated balance sheets. If recognized, the total gross unrecognized tax benefits would reduce the effective tax rate on income from continuing operations. Accrued interest and penalties related to unrecognized tax benefits as of December 31, 2019 were $1.9 million; this balance changed less than $0.1 million compared to June 30, 2019. We classify interest and penalties as components of income tax expense. It is reasonably possible that the amount of the liability for unrecognized tax benefits may change within the next twelve months and an estimate of the range of possible changes includes an increase in our liability of up to $2.6 million.

In June 2019, the U.S. Ninth Circuit Court of Appeals reversed the 2015 decision of the U.S. Tax Court in Altera Corp. v. Commissioner which found that the Treasury regulations addressing the treatment of stock-based compensation in a cost-sharing arrangement with a related party were invalid. As our tax filing position is consistent with the Treasury regulations, no adjustment to our financial statements is required. However, due to uncertainties with respect to the ultimate resolution of this case, we will continue to monitor developments in this case.

Our major tax jurisdictions are the United States, Hong Kong SAR, and Japan. From fiscal 2013 onward, we remain subject to examination by one or more of these jurisdictions. In August 2018, we received the revenue agent’s report resolving the fiscal 2014 and fiscal 2015 examination by the Internal Revenue Service with no material impact on our condensed consolidated financial statements. Our case was reviewed by the Joint Committee on Taxation, which concluded in September 2019 with no further impact to our condensed consolidated financial statements.

 

21


 

14. Segment, Customers, and Geographic Information

We operate in 1 segment: the development, marketing, and sale of semiconductor products used in electronic devices and products. We generate our revenue from 3 broad product categories: the Mobile product market, the personal computing, or PC, product market, and the Internet of Things, or IoT, product market. We sell our products to original equipment manufacturers, or OEMs, and to contract manufacturers that provide manufacturing services to OEMs.

Net revenue within geographic areas based on our customers’ locations for the periods presented was as follows (in millions):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

China

 

$

138.2

 

 

$

251.7

 

 

$

315.0

 

 

$

479.5

 

Japan

 

 

149.5

 

 

 

78.0

 

 

 

212.7

 

 

 

146.5

 

Taiwan

 

 

56.4

 

 

 

61.0

 

 

 

121.6

 

 

 

137.4

 

South Korea

 

 

21.6

 

 

 

11.7

 

 

 

38.0

 

 

 

31.8

 

Other

 

 

20.5

 

 

 

13.9

 

 

 

37.0

 

 

 

29.3

 

United States

 

 

2.1

 

 

 

9.2

 

 

 

3.9

 

 

 

18.6

 

 

 

$

388.3

 

 

$

425.5

 

 

$

728.2

 

 

$

843.1

 

 

Net revenue from our customers for each group of similar products was as follows (in millions):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Mobile product applications

 

$

217.7

 

 

$

274.4

 

 

$

402.0

 

 

$

537.1

 

PC product applications

 

 

81.6

 

 

 

63.9

 

 

 

149.4

 

 

 

132.5

 

IoT product applications

 

 

89.0

 

 

 

87.2

 

 

 

176.8

 

 

 

173.5

 

 

 

$

388.3

 

 

$

425.5

 

 

$

728.2

 

 

$

843.1

 

Net revenue from major customers as a percentage of total net revenue for the periods presented was as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Customer A

 

21%

 

 

*

 

 

15%

 

 

*

 

Customer B

 

13%

 

 

*

 

 

11%

 

 

*

 

Customer C

 

*

 

 

20%

 

 

*

 

 

19%

 

Customer D

 

*

 

 

14%

 

 

*

 

 

12%

 

 

*

Less than 10%

 

 

We extend credit based on evaluation of a customer’s financial condition, and we generally do not require collateral. Major customer accounts receivable as a percentage of total accounts receivable were as follows:

 

 

 

December 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

Customer A

 

21%

 

 

*

 

Customer B

 

16%

 

 

*

 

Customer C

 

11%

 

 

25%

 

Customer D

 

*

 

 

16%

 

 

*

Less than 10%

 

 

22


 

15. Comprehensive Income

Our comprehensive income generally consists of net income plus the effect of unrealized gains and losses on our investments, primarily due to temporary changes in market value of certain of our auction rate securities, or ARS, investments. In addition, we recognize the noncredit portion of other-than-temporary impairment on debt securities in other comprehensive income. We recognize foreign currency remeasurement adjustments and foreign currency transaction gains and losses in our condensed consolidated statements of income as the U.S. dollar is the functional currency of our foreign entities.

 

 

16. Restructuring Activities

In November 2019, we committed to and initiated activities to restructure and further improve efficiencies in our operational activities to align our cost structure consistent with our revenue levels. Restructuring costs related to the November 2019 restructuring activities were recorded to the restructuring costs line item within our condensed consolidated statements of income. These costs related to severance costs for a reduction in headcount. The activities relating to the November 2019 restructuring action are expected to be complete by the end of fiscal 2020. The restructuring liability activities relating to the November 2019 initiated activity during fiscal 2020 were as follows (in millions):

 

 

 

Employee Severance

 

 

 

and Benefits

 

Accruals

 

$

13.3

 

Cash payments

 

 

(5.7

)

Balance as of December 31, 2019

 

$

7.6

 

 

In August 2018, we committed to and initiated a restructuring of our mobile fingerprint optical business. The costs for this restructuring activity primarily related to severance costs for a reduction in headcount and related costs. These activities were complete as of June 30, 2019. In June 2019, we committed to and initiated a restructuring action intended to reduce our operating cost structure further. The costs for this restructuring action primarily related to severance costs for a reduction in headcount. Restructuring costs related to these fiscal 2019 restructuring activities were recorded to the restructuring costs line item within our condensed consolidated statements of income. The activities relating to the June 2019 restructuring action are complete as of December 31, 2019.

The restructuring liability for the fiscal 2019 initiated activity during fiscal 2019 and the six months ended December 31, 2019 were as follows (in millions):

 

 

 

Employee Severance

 

 

 

and Benefits

 

Accruals

 

$

17.7

 

Cash payments

 

 

(12.5

)

Balance as of June 30, 2019

 

 

5.2

 

Accruals

 

 

7.5

 

Cash payments

 

 

(11.1

)

Balance as of December 31, 2019

 

$

1.6

 

 

23


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements and Factors That May Affect Results

This Quarterly Report on Form 10-Q for the quarter ended December 28, 2019 (this “Report”) contains forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For ease of presentation, this Report shows reporting periods ending on calendar quarter end dates as of and for all periods presented, unless otherwise indicated. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business, and can be identified by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements may include words such as “expect,” “anticipate,” “intend,” “believe,” “estimate,” “plan,” “target,” “strategy,” “continue,” “may,” “will,” “should,” variations of such words, or other words and terms of similar meaning. All forward-looking statements reflect our best judgment and are based on several factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Such factors include, but are not limited to, the risks as identified in the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” sections of our Annual Report on Form 10-K for the fiscal year ended June 29, 2019, and other risks as identified from time to time in our SEC reports. Forward-looking statements are based on information available to us on the date hereof, and we do not have, and expressly disclaim, any obligation to publicly release any updates or any changes in our expectations, or any change in events, conditions, or circumstances on which any forward-looking statement is based. Our actual results and the timing of certain events could differ materially from the forward-looking statements. These forward-looking statements do not reflect the potential impact of any mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing.

Statements made in this Report, unless the context otherwise requires, include the use of the terms “us,” “we,” “our,” the “Company” and “Synaptics” to refer to Synaptics Incorporated and its consolidated subsidiaries.

Overview

We are a leading worldwide developer and supplier of custom-designed human interface semiconductor product solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing, communications, entertainment, and other electronic devices. We currently generate revenue from the markets for smartphones, tablets, personal computer, or PC, products, primarily notebook computers, Internet of Things, or IoT, products which include smart devices with voice, speech and video solutions, and other select electronic devices, including devices in automobiles, with our custom human interface solutions. The solutions we deliver either contain or consist of our touch-, display driver-, fingerprint authentication-based-, voice and speech-, or video-semiconductor solutions, which include our chip, customer-specific firmware, and software.

Many of our customers have manufacturing operations in China, and many of our OEM customers have established design centers in Asia. With our expanding global presence, including offices in China, Hong Kong, India, Japan, Korea, Switzerland, Taiwan, and the United States, we are well positioned to provide local sales, operational, and engineering support services to our existing customers, as well as potential new customers, on a global basis.

Our manufacturing operations are based on a variable cost model in which we outsource all of our production requirements and generally drop ship our products directly to our customers from our contract manufacturers’ facilities, eliminating the need for significant capital expenditures and allowing us to minimize our investment in inventories. This approach requires us to work closely with our contract manufacturers and semiconductor fabricators to ensure adequate production capacity to meet our forecasted volume requirements. We provide our contract manufacturers with six-month rolling forecasts and issue purchase orders based on our anticipated requirements for the next 90 days. However, we generally do not have long-term supply contracts with our contract manufacturers. We use third-party wafer manufacturers to supply wafers and third-party packaging manufacturers to package our proprietary ASICs. In certain cases, we rely on a single source or a limited number of suppliers to provide other key components of our products. Our cost of revenue includes all costs associated with the production of our products, including materials; logistics; amortization of intangibles related to acquired developed technology; backlog; supplier arrangements; manufacturing, assembly, and test costs paid to third-party manufacturers; and related overhead costs associated with our indirect manufacturing operations personnel. Additionally, we charge all warranty costs, losses on inventory purchase obligations, and write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value, to cost of revenue.

Our gross margin generally reflects the combination of the added value we bring to our OEM customers’ products by meeting their custom design requirements and the impact of our ongoing cost-improvement programs. These cost-improvement programs include reducing materials and component costs and implementing design and process improvements. Our newly introduced products may have lower margins than our more mature products, which have realized greater benefits associated with our ongoing cost-improvement programs. As a result, new product introductions may initially negatively impact our gross margin.

24


 

Our research and development expenses include costs for supplies and materials related to product development, as well as the engineering costs incurred to design ASICs and human interface solutions for OEM customers prior to and after our OEMs’ commitment to incorporate those solutions into their products. In addition, we expense in-process research and development projects acquired as asset acquisitions, which have not yet reached technological feasibility, and which have no foreseeable alternative future use. We continue to commit to the technological and design innovation required to maintain our position in our existing markets, and to adapt our existing technologies or develop new technologies for new markets.

Selling, general, and administrative expenses include expenses related to sales, marketing, and administrative personnel; internal sales and outside sales representatives’ commissions; market and usability research; outside legal, accounting, and consulting costs; and other marketing and sales activities.

Acquired intangibles amortization, included in operating expenses, consists primarily of amortization of customer relationship and tradenames intangible assets recognized under the purchase method for business combinations.

Restructuring costs primarily reflect severance and facilities consolidation costs related to the restructuring of our operations to reduce operating expenses. These headcount and facilities related costs were in cost of revenue, research and development, and selling, general and administrative expenses.

Interest and other expense, net, primarily reflects interest expense on our convertible notes as well as the amortization of debt issuance costs and discount on our convertible notes, partially offset by interest income earned on our cash and cash equivalents as well as impairment recovery on investments.

Equity investment loss includes amortization of intangible assets as well as our portion of the net loss reflected under the equity method of accounting in connection with our investment in OXi Technology Ltd.

Divestiture

In December 2019, we entered into an asset purchase agreement with a third party to sell the assets of our LCD Touch Controller and Display Driver Integration, or TDDI, product line for LCD mobile displays. We will retain our automotive TDDI product line and our discrete touch and discrete display driver product lines supporting LCD and OLED for the mobile market. Subject to certain post-closing adjustments and indemnification obligations, the aggregate consideration payable by the buyer will be $120.0 million in cash, the dollar value of specified inventory at a purchase price of standard cost plus 5% in cash, and the assumption of certain liabilities, as set forth in the asset purchase agreement. The transaction is expected to close in the fourth quarter of fiscal 2020, subject to satisfaction of certain closing conditions.

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the three months ended December 31, 2019, compared with our critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended June 29, 2019.

25


 

Results of Operations

Certain of the data used in our condensed consolidated statements of income for the periods indicated, together with comparative absolute and percentage changes in these amounts, were as follows (in millions, except percentages):

 

 

 

Three Months Ended December 31,

 

 

Six Months Ended December 31,

 

 

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Mobile product applications

 

$

217.7

 

 

$

274.4

 

 

$

(56.7

)

 

 

(20.7

%)

 

$

402.0

 

 

$

537.1

 

 

$

(135.1

)

 

 

(25.2

%)

PC product applications

 

 

81.6

 

 

 

63.9

 

 

 

17.7

 

 

 

27.7

%

 

 

149.4

 

 

 

132.5

 

 

 

16.9

 

 

 

12.8

%

IoT product applications

 

 

89.0

 

 

 

87.2

 

 

 

1.8

 

 

 

2.1

%

 

 

176.8

 

 

 

173.5

 

 

 

3.3

 

 

 

1.9

%

Net revenue

 

 

388.3

 

 

 

425.5

 

 

 

(37.2

)

 

 

(8.7

%)

 

 

728.2

 

 

 

843.1

 

 

 

(114.9

)

 

 

(13.6

%)

Gross margin

 

 

159.3

 

 

 

149.8

 

 

 

9.5

 

 

 

6.3

%

 

 

285.5

 

 

 

290.7

 

 

 

(5.2

)

 

 

(1.8

%)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

77.0

 

 

 

84.2

 

 

 

(7.2

)

 

 

(8.6

%)

 

 

163.0

 

 

 

174.3

 

 

 

(11.3

)

 

 

(6.5

%)

Selling, general, and administrative

 

 

31.5

 

 

 

35.6

 

 

 

(4.1

)

 

 

(11.5

%)

 

 

59.0

 

 

 

69.4

 

 

 

(10.4

)

 

 

(15.0

%)

Acquired intangibles amortization

 

 

3.0

 

 

 

2.9

 

 

 

0.1

 

 

 

3.4

%

 

 

5.9

 

 

 

5.8

 

 

 

0.1

 

 

 

1.7

%

Restructuring costs

 

 

13.3

 

 

 

2.1

 

 

 

11.2

 

 

 

533.3

%

 

 

19.9

 

 

 

10.4

 

 

 

9.5

 

 

 

91.3

%

Operating income

 

 

34.5

 

 

 

25.0

 

 

 

9.5

 

 

 

38.0

%

 

 

37.7

 

 

 

30.8

 

 

 

6.9

 

 

 

22.4

%

Interest and other expense, net

 

 

(2.3

)

 

 

(4.3

)

 

 

2.0

 

 

 

46.5

%

 

 

(5.9

)

 

 

(6.2

)

 

 

0.3

 

 

 

4.8

%

Income/(loss) before provision/

   (benefit) for income taxes

 

 

32.2

 

 

 

20.7

 

 

 

11.5

 

 

 

55.6

%

 

 

31.8

 

 

 

24.6

 

 

 

7.2

 

 

 

29.3

%

Provision/(benefit) for income taxes

 

 

12.0

 

 

 

7.5

 

 

 

4.5

 

 

 

60.0

%

 

 

7.1

 

 

 

7.2

 

 

 

(0.1

)

 

 

(1.4

%)

Equity investment loss

 

 

(0.4

)

 

 

(0.4

)

 

 

-

 

 

 

0.0

%

 

 

(0.9

)

 

 

(0.8

)

 

 

(0.1

)

 

 

(12.5

%)

Net income

 

$

19.8

 

 

$

12.8

 

 

$

7.0

 

 

 

54.7

%

 

$

23.8

 

 

$

16.6

 

 

$

7.2

 

 

 

43.4

%

 

Certain of the data used in our condensed consolidated statements of income presented here as a percentage of net revenue for the periods indicated were as follows:

 

 

 

Three Months Ended

 

 

Percentage

Point

 

 

Six Months Ended

 

 

Percentage Point

 

 

 

December 31,

 

 

Increase/

 

 

December 31,

 

 

Increase/

 

 

 

2019

 

 

2018

 

 

(Decrease)

 

 

2019

 

 

2018

 

 

(Decrease)

 

Mobile product applications

 

 

56.1

%

 

 

64.5

%

 

 

(8.4

%)

 

 

55.2

%

 

 

63.7

%

 

 

(8.5

%)

PC product applications

 

 

21.0

%

 

 

15.0

%

 

 

6.0

%

 

 

20.5

%

 

 

15.7

%

 

 

4.8

%

IoT product applications

 

 

22.9

%

 

 

20.5

%

 

 

2.4

%

 

 

24.3

%

 

 

20.6

%

 

 

3.7

%

Net revenue

 

 

100.0

%

 

 

100.0

%

 

 

0.0

%

 

 

100.0

%

 

 

100.0

%

 

 

0.0

%

Gross margin

 

 

41.0

%

 

 

35.2

%

 

 

5.8

%

 

 

39.2

%

 

 

34.5

%

 

 

4.7

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

19.8

%

 

 

19.8

%

 

 

0.0

%

 

 

22.4

%

 

 

20.7

%

 

 

1.7

%

Selling, general, and administrative

 

 

8.1

%

 

 

8.4

%

 

 

(0.3

%)

 

 

8.1

%

 

 

8.2

%

 

 

(0.1

%)

Acquired intangibles amortization

 

 

0.8

%

 

 

0.7

%

 

 

0.1

%

 

 

0.8

%

 

 

0.7

%

 

 

0.1

%

Restructuring costs

 

 

3.4

%

 

 

0.5

%

 

 

2.9

%

 

 

2.7

%

 

 

1.2

%

 

 

1.5

%

Operating income

 

 

8.9

%

 

 

5.9

%

 

 

3.0

%

 

 

5.2

%

 

 

3.7

%

 

 

1.5

%

Interest and other expense, net

 

 

(0.6

%)

 

 

(1.0

%)

 

 

0.4

%

 

 

(0.8

%)

 

 

(0.7

%)

 

 

(0.1

%)

Income/(loss) before provision/

   (benefit) for income taxes

 

 

8.3

%

 

 

4.9

%

 

 

3.4

%

 

 

4.4

%

 

 

2.9

%

 

 

1.5

%

Provision/(benefit) for income taxes

 

 

3.1

%

 

 

1.8

%

 

 

1.3

%

 

 

1.0

%

 

 

0.9

%

 

 

0.1

%

Equity investment loss

 

 

(0.1

%)

 

 

(0.1

%)

 

 

0.0

%

 

 

(0.1

%)

 

 

(0.1

%)

 

 

0.0

%

Net income

 

 

5.1

%

 

 

3.0

%

 

 

2.1

%

 

 

3.3

%

 

 

2.0

%

 

 

1.3

%

 

26


 

Net Revenue

Net revenue was $388.3 million for the three months ended December 31, 2019, compared with $425.5 million for the three months ended December 31, 2018, a decrease of $37.2 million, or 8.7%. Of this net revenue, $217.7 million, or 56.1%, was from Mobile product applications, $89.0 million, or 22.9%, was from IoT product applications, and $81.6 million, or 21.0%, was from PC product applications. The decrease in net revenue for the three months ended December 31, 2019 was primarily attributable to a decrease in net revenue from Mobile product applications, partially offset by an increase in net revenue from PC product applications and IoT product applications. Net revenue from Mobile product applications decreased as a result of a decline in units sold (which decreased 18.4%) as well as slightly lower average selling prices for Mobile product applications. Net revenue from PC product applications increased due to a growth in units sold (which increased 13.9%) for PC product applications as well as higher average selling prices (which increased 12.1%). Net revenue from IoT product applications increased as a result of an increase in units sold, partially offset by lower average selling prices for IoT product applications.

Net revenue was $728.2 million for the six months ended December 31, 2019, compared with $843.1 million for the six months ended December 31, 2018, a decrease of $114.9 million, or 13.6%. Of this net revenue, $402.0 million, or 55.2%, was from Mobile product applications, $176.8 million, or 24.3%, was from IoT product applications, and $149.4 million, or 20.5%, was from PC product applications. The decrease in net revenue for the six months ended December 31, 2019 was primarily attributable to a decrease in net revenue from Mobile product applications, partially offset by an increase in net revenue from PC product applications and IoT product applications. Net revenue from Mobile product applications decreased as a result of a decline in units sold (which decreased 24.9%) as well as slightly lower average selling prices for Mobile product applications. Net revenue from PC product applications increased due to higher average selling prices (which increased 12.8%). Net revenue from IoT product applications increased as a result of an increase in units sold, partially offset by lower average selling prices for IoT product applications.

Gross Margin

Gross margin as a percentage of net revenue was 41.0%, or $159.3 million, for the three months ended December 31, 2019, compared with 35.2%, or $149.8 million, for the three months ended December 31, 2018. The 580 basis point increase in gross margin for the three months ended December 31, 2019, was primarily due to a favorable product mix and a $6.9 million decrease in amortization for amortizable intangibles which are now fully amortized.

Gross margin as a percentage of net revenue was 39.2%, or $285.5 million, for the six months ended December 31, 2019, compared with 34.5%, or $290.7 million, for the six months ended December 31, 2018. The 470 basis point increase in gross margin for the six months ended December 31, 2019, was primarily due to a favorable product mix and a $8.6 million decrease in amortization for amortizable intangibles which are now fully amortized.

We continually introduce new product solutions, many of which have life cycles of less than one year. Further, because we sell our technology solutions in designs that are generally unique or specific to an OEM customer’s application, gross margin varies on a product-by-product basis, making our cumulative gross margin a blend of our product-specific designs. As a virtual manufacturer, our gross margin percentage is generally not materially impacted by our shipment volume. We charge losses on inventory purchase obligations and write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value (including warranty costs) to cost of revenue.

Operating Expenses

Research and Development Expenses. Research and development expenses decreased $7.2 million to $77.0 million for the three months ended December 31, 2019, compared with the three months ended December 31, 2018. The decrease in research and development expenses primarily reflected a net $1.9 million decrease in personnel-related costs, which was due to a decrease in average headcount for the three months ended December 31, 2019 as compared to the three months ended December 31, 2018, as a result of restructuring activities to reduce operating costs; a $1.9 million decrease in infrastructure costs related to facilities; a $1.8 million decrease in non-employee services; and a $1.0 million decrease in travel related costs. The decrease in personnel-related costs was partially offset by $2.0 million of retention program costs with key engineering and management employees designed to ensure operational continuity and support as we transition the company through senior level management and product focus changes.

Research and development expenses decreased $11.3 million to $163.0 million for the six months ended December 31, 2019, compared with the six months ended December 31, 2018. The decrease in research and development expenses primarily reflected a net $3.7 million decrease in personnel-related costs which was due to a decrease in average headcount for the six months ended December 31, 2019 as compared to the six months ended December 31, 2018, as a result of restructuring activities to reduce operating costs; a $3.0 million decrease in non-employee services; a $2.6 million decrease in infrastructure costs related to facilities; a $2.1 million decrease in project related costs; a $1.7 million decrease in travel related costs; and a $1.2 million decrease in software licensing and maintenance costs. The decrease in personnel-related costs was partially offset by $4.4 million of retention program costs with key engineering and management employees designed to ensure operational continuity and support as we transition the company through senior level management and product focus changes.

27


 

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased $4.1 million to $31.5 million for the three months ended December 31, 2019, compared with the three months ended December 31, 2018. The decrease in selling, general, and administrative expenses primarily reflected a net $1.6 million decrease in personnel-related costs which was primarily due to a reduction in headcount as a result of restructuring activities to reduce operating costs; a $1.2 million decrease in non-employee services; a $1.2 million decrease in bad debt expense; a $0.9 million decrease in travel related expenses; partially offset by a $1.1 million increase in legal fees. The decrease in personnel-related costs was partially offset by $1.5 million of retention program costs with key management employees designed to ensure operational continuity and support as we transition the company through senior level management and product focus changes.

Selling, general, and administrative expenses decreased $10.4 million to $59.0 million for the six months ended December 31, 2019, compared with the six months ended December 31, 2018. The decrease in selling, general, and administrative expenses primarily reflected a net $7.3 million decrease in personnel-related costs which was primarily due to a reduction in headcount as a result of restructuring activities to reduce operating costs; a $2.3 million decrease in non-employee services; a $1.5 million decrease in bad debt expense; a $1.4 million decrease in travel related expenses; partially offset by a $1.7 million increase in legal fees. The decrease in personnel-related costs was partially offset by $2.8 million of retention program costs with key management employees designed to ensure operational continuity and support as we transition the company through senior level management and product focus changes.

Acquired Intangibles Amortization. Acquired intangibles amortization reflects the amortization of intangibles acquired through acquisitions. For further discussion of acquired intangibles amortization, see Note 7 Acquired Intangibles and Goodwill included in the condensed consolidated financial statements contained elsewhere in this Report.

Restructuring Costs.  Restructuring costs of $19.9 million in the six months ended December 31, 2019 reflect severance costs for restructuring of our operations to reduce ongoing operating costs, which commenced in the fourth quarter of fiscal 2019 and the second quarter of fiscal 2020. The restructuring activities are expected to be complete in the fourth quarter of fiscal 2020. See Note 16 Restructuring Activities included in the condensed consolidated financial statements contained elsewhere in this Report.  

Interest and Other Expense, Net. Interest and other expense, net primarily includes the amortization of debt discount and issuance costs, as well as interest on our debt, partially offset by interest income earned on our cash and cash equivalents as well as impairment recovery on investments. Interest and other expense, net was relatively flat at $5.9 million for the six months ended December 31, 2019, as compared to $6.2 million for the six months ended December 31, 2018.

Provision for Income Taxes.  We account for income taxes under the asset and liability method. The provision for income taxes recorded in interim periods is recorded by applying the estimated annual effective tax rate to year-to-date income before provision for income taxes, excluding the effects of significant unusual or infrequently occurring discrete items. The tax effects of discrete items are recorded in the same period that the related discrete items are reported and results in a difference between the actual effective tax rate and the estimated annual effective tax rate.

The provision for income taxes of $12.0 million and $7.5 million for the three months ended December 31, 2019 and 2018, respectively, represented estimated federal, foreign, and state income taxes. The effective tax rate for the three months ended December 31, 2019 diverged from the combined U.S. federal and state statutory tax rate primarily because of foreign withholding taxes, the impact of accounting for qualified stock options, and global intangible low-taxed income, or GILTI, partially offset by the benefit of research credits, foreign tax credits and income taxed at lower tax rates. The effective tax rate for the three months ended December 31, 2018, diverged from the combined U.S. federal and state statutory tax rate, primarily because of foreign withholding taxes, nondeductible amortization, the impact of net shortfalls in share-based compensation deductions and GILTI, partially offset by the benefit of research credits, foreign tax credits, foreign-derived intangible income deduction, release of reserves related to uncertain tax positions and foreign income taxed at lower tax rates.

The provision for income taxes of $7.1 million and $7.2 million for the six months ended December 31, 2019 and 2018, respectively, represented estimated federal, foreign, and state income taxes. The effective tax rate for the six months ended December 31, 2019 diverged from the combined U.S. federal and state statutory tax rate primarily because of foreign withholding taxes, the impact of accounting for qualified stock options and global intangible low-taxed income, or GILTI, partially offset by the benefit of research credits, foreign tax credits and foreign income taxed at lower tax rates. The effective tax rate for the six months ended December 31, 2018, diverged from the combined U.S. federal and state statutory tax rate, primarily due to foreign withholding taxes, nondeductible amortization, the impact of net shortfalls in share-based compensation deductions and GILTI, partially offset by the benefit of research credits, foreign tax credits, foreign-derived intangible income deduction, excess share-based compensation deductions, release of reserves related to uncertain tax positions and foreign income taxed at lower tax rates.

28


 

In June 2019, the U.S. Ninth Circuit Court of Appeals reversed the 2015 decision of the U.S. Tax Court in Altera Corp. v. Commissioner which found that the Treasury regulations addressing the treatment of stock-based compensation in a cost-sharing arrangement with a related party were invalid. As our tax filing position is consistent with the Treasury regulations, no adjustment to our financial statements is required. However, due to uncertainties with respect to the ultimate resolution, we will continue to monitor developments in this case.

Liquidity and Capital Resources

Our cash and cash equivalents were $424.8 million as of December 31, 2019, compared with $327.8 million as of June 30, 2019, an increase of $97.0 million. The increase primarily reflected $120.0 million of net cash provided by operating activities, $4.8 million of net proceeds from issuance of shares, partially offset by $17.0 million used to repurchase 555,663 shares of our common stock, $8.2 million used for the purchase of property and equipment, and $2.5 million used for an asset acquisition completed in August 2019. At this time, we consider earnings of our foreign subsidiaries indefinitely invested overseas and have made no provision for income or withholding taxes, other than the one-time transition tax incurred as part of the Tax Cuts and Jobs Act, that may result from a future repatriation of those earnings. As of December 31, 2019, $172.7 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we would be required to accrue and pay U.S. taxes to repatriate these funds.

Cash Flows from Operating Activities. Operating activities during the six months ended December 31, 2019 generated $120.0 million compared with $63.5 million net cash generated during the six months ended December 31, 2018. For the six months ended December 31, 2019, the primary operating activities were adjustments for non-cash charges of $81.5 million and a net change in operating assets and liabilities of $14.7 million. The net change in operating assets and liabilities was primarily attributable to a $55.6 million decrease in inventory and a $15.1 million increase in accrued compensation, partially offset by a $30.0 million decrease in other accrued liabilities, a $16.4 million increase in accounts receivable, net, and a decrease of $7.4 million in accounts payable. From June 30, 2019 to December 31, 2019, our days sales outstanding decreased from 70 days to 57 days due to a larger percentage of the quarter’s net revenue occurring late in the June 30, 2019 quarter compared with a smaller percentage of the quarter’s net revenue occurring late in the December 31, 2019 quarter. Our annual inventory turns increased from five to eleven, which was driven by the classification of $20.9 million of inventory as current assets held for sale (which had an impact of 2 turns) as well as stronger product demand throughout the quarter.

Cash Flows from Investing Activities. Cash used in investing activities during the six months ended December 31, 2019 consisted of $8.2 million for purchases of property and equipment and $2.5 million used for an asset acquisition completed in August 2019.  

Cash Flows from Financing Activities. Net cash used in financing activities for the six months ended December 31, 2019 was $12.2 million compared with $73.1 million used in financing activities for the six months ended December 31, 2018. Net cash used in financing activities for the six months ended December 31, 2019 was related to $17.0 million used to repurchase 555,663 shares of our common stock.  

Common Stock Repurchase Program. As of December 31, 2019, our board has cumulatively authorized $1.4 billion for our common stock repurchase program, which will expire in July 2021. The program authorizes us to purchase our common stock in the open market or in privately negotiated transactions, depending upon market conditions and other factors. The number of shares purchased and the timing of purchases are based on the level of our cash balances, general business and market conditions, and other factors. Common stock purchased under this program is held as treasury stock. From April 2005 through December 31, 2019, we purchased 31,489,876 shares of our common stock in the open market for an aggregate cost of $1.2 billion. During the six months ended December 31, 2019, we repurchased 555,663 shares of our common stock for a total cost of $17.0 million. As of December 31, 2019, the remaining available authorization under our common stock repurchase program was $190.6 million.

Convertible Debt

On June 20, 2017, we entered into a purchase agreement, or the Purchase Agreement, with Wells Fargo Securities, LLC, as representative of the initial purchasers named therein, collectively, the Initial Purchasers, pursuant to which we agreed to issue and sell, and the Initial Purchasers agreed to purchase, $500 million aggregate principal amount of our 0.50% convertible senior notes due 2022, or the Notes, in a private placement transaction. Pursuant to the Purchase Agreement, we also granted the Initial Purchasers a 30-day option to purchase up to an additional $25 million aggregate principal amount of Notes, which was exercised in full on June 21, 2017. The net proceeds, after deducting the Initial Purchasers’ discounts, were $514.5 million, which included proceeds from the Initial Purchasers’ exercise of their option to purchase additional Notes. We received the net proceeds on June 26, 2017, which we used to repurchase shares of our common stock, retire our outstanding bank debt, and provide additional cash resources to fund the acquisition of Conexant Systems, LLC and the assets of Marvell Technology Group, Ltd.’s multimedia solutions business.

29


 

The Notes bear interest at a rate of 0.50% per year. Interest has accrued since June 26, 2017 and is payable semi-annually in arrears, on June 15 and December 15 of each year, beginning on December 15, 2017. The Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any our liabilities that are not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

The Notes mature on June 15, 2022, or the Maturity Date, unless earlier repurchased, redeemed or converted.

Holders may convert all or any portion of their Notes, in multiples of $1,000 principal amounts, at their option at any time prior to the close of business on the business day immediately preceding March 15, 2022 under certain defined circumstances.

On or after March 15, 2022 until the close of business on the business day immediately preceding the Maturity Date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amounts, at the option of the holder. Upon conversion, we will pay or deliver, at our election, shares of common stock, cash, or a combination of cash and shares of common stock.

The conversion rate for the Notes is initially 13.6947 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $73.02 per share of common stock). The conversion rate is subject to adjustment in certain circumstances.

Upon the occurrence of a fundamental change (as defined in the Notes indenture), holders of the Notes may require us to repurchase for cash all or a portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the fundamental change repurchase date.

We may not redeem the Notes prior to June 20, 2020. We may redeem for cash all or any portion of the Notes, at our option, on or after June 20, 2020, if the last reported sale price of our common stock, as determined by us, has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest up to, but excluding, the redemption date. Our policy is to settle the principal amount of our Notes with cash upon conversion or redemption.

Bank Credit Facility. We have a $200.0 million revolving credit facility, which includes a $20 million sublimit for letters of credit and a $20 million sublimit for swingline loans. Under the terms of the revolving credit facility, or the Agreement, we may, subject to the satisfaction of certain conditions, request increases in the revolving credit facility commitments in an aggregate principal amount of up to $100 million to the extent existing or new lenders agree to provide such increased or additional commitments, as applicable. Proceeds under the revolving credit facility are available for working capital and general corporate purposes. As of December 31, 2019, there was no balance outstanding under the revolving credit facility.

The revolving credit facility is required to be repaid in full on the earlier of (i) September 27, 2022, and (ii) the date 91 days prior to the Maturity Date of the Notes if the Notes have not been refinanced in full by such date. Debt issuance costs of $2.3 million are amortizing over 60 months.

Our obligations under the Agreement are guaranteed by the material domestic subsidiaries of our Company, subject to certain exceptions (such material subsidiaries, together with our Company, collectively, the Credit Parties). The obligations of the Credit Parties under the Agreement and the other loan documents delivered in connection therewith are secured by a first priority security interest in substantially all of the existing and future personal property of the Credit Parties, including, without limitation, 65% of the voting capital stock of certain of the Credit Parties’ direct foreign subsidiaries, subject to certain exceptions.

The revolving credit facility bears interest at our election of a Base Rate plus an Applicable Margin or LIBOR plus an Applicable Margin. Swingline loans bear interest at a Base Rate plus an Applicable Margin. The Base Rate is a floating rate that is the greater of the Prime Rate, the Federal Funds Rate plus 50 basis points, or LIBOR plus 100 basis points. The Applicable Margin is based on a sliding scale which ranges from 0.25 to 100 basis points for Base Rate loans and 100 basis points to 175 basis points for LIBOR loans. We are required to pay a commitment fee on any unused commitments under the Agreement which is determined on a leverage-based sliding scale ranging from 0.175% to 0.25% per annum. Interest and fees are payable on a quarterly basis. Under our credit facility, when the LIBOR index is discontinued, we will switch to a comparable or successor rate as approved by the Administrative Agent, which is currently anticipated to be the SOFR.

30


 

Under the Agreement, there are various restrictive covenants, including three financial covenants which limit the consolidated total leverage ratio, or leverage ratio, the consolidated interest coverage ratio, or interest coverage ratio, a restriction which places a limit on the amount of capital expenditures that may be made in any fiscal year, a restriction that permits up to $50 million per fiscal quarter of accounts receivable financings, and sets the Specified Leverage Ratio. The leverage ratio is the ratio of debt as of the measurement date to earnings before interest, taxes, depreciation and amortization, or EBITDA, for the four consecutive quarters ending with the quarter of measurement. The current leverage ratio shall not exceed 3.50 to 1.00 provided that for the four fiscal quarters ending after the date of a material acquisition, such maximum leverage ratio shall be adjusted to 3.75 to 1.00, and thereafter, shall not be more than 3.50 to 1.00. The interest coverage ratio is EBITDA to interest expense for the four consecutive quarters ending with the quarter of measurement. The interest coverage ratio must not be less than 3.50 to 1.0 during the term of the Agreement. The Specified Leverage Ratio is the ratio used in determining, among other things, whether we are permitted to make dividends and/or prepay certain indebtedness, at a fixed ratio of 3.00 to 1.00.  

$100 Million Shelf Registration. We have registered an aggregate of $100.0 million of common stock and preferred stock for issuance in connection with acquisitions, which shares will generally be freely tradeable after their issuance under the Securities Act unless held by an affiliate of the Company, in which case such shares will be subject to the volume and manner of sale restrictions of Rule 144 of the Securities Act.

Liquidity and Capital Resources. We believe our existing cash and cash equivalents, anticipated cash flows from operating activities, and available credit under our revolving credit facility will be sufficient to meet our working capital and other cash requirements, including our debt service obligations, for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue, the timing and extent of spending to support product development efforts, costs associated with restructuring activities net of projected savings from those activities, costs related to protecting our intellectual property, the expansion of sales and marketing activities, timing of introduction of new products and enhancements to existing products, costs to ensure access to adequate manufacturing, costs of maintaining sufficient space for our workforce, the continuing market acceptance of our product solutions, our common stock repurchase program, and the amount and timing of our investments in, or acquisitions of, other technologies or companies. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of business opportunities or to respond to competitive pressures could be limited or severely constrained.

Based on our ability to access our cash and cash equivalents, our expected operating cash flows, and our other sources of cash, we do not anticipate the need to remit undistributed earnings of our foreign subsidiaries to meet our working capital and other cash requirements, but if we did remit such earnings, we may be required to accrue and pay certain state and foreign taxes to repatriate these funds, which would adversely impact our financial position and results of operations.

Contractual Obligations and Commercial Commitments

Our material contractual obligations and commercial commitments as of December 31, 2019 were as follows (in millions):

 

 

 

Remaining

in Fiscal

Year 2020

 

 

Fiscal

Year 2021

 

 

Fiscal

Year 2022

 

 

Fiscal

Year 2023

 

 

Fiscal

Year 2024

 

 

Thereafter

 

 

Total

 

Long-term debt (1)

 

$

1.3

 

 

$

2.6

 

 

$

527.6

 

 

$

 

 

$

 

 

$

 

 

$

531.5

 

Leases

 

 

4.7

 

 

 

8.6

 

 

 

5.8

 

 

 

3.8

 

 

 

2.5

 

 

 

1.8

 

 

 

27.2

 

Purchase obligations and

   other commitments (2)

 

 

38.5

 

 

 

13.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51.5

 

Transition tax payable (3)

 

 

0.9

 

 

 

0.9

 

 

 

0.9

 

 

 

1.8

 

 

 

2.4

 

 

 

3.0

 

 

 

9.9

 

Total

 

$

45.4

 

 

$

25.1

 

 

$

534.3

 

 

$

5.6

 

 

$

4.9

 

 

$

4.8

 

 

$

620.1

 

 

(1)

Represents the principal and interest payable through the maturity date of the underlying contractual obligation.

(2)

Purchase obligations and other commitments include payments due for inventory purchase obligations with contract manufacturers, long-term software tool licenses, and other licenses.

(3)

Represents the remaining balance of the one-time transition tax liability associated with our deemed repatriation of accumulated foreign earnings as a result of the enactment of the Tax Cuts and Jobs Act into law on December 22, 2017.

The amounts in the table above exclude unrecognized tax benefits of $20.8 million. As of December 31, 2019, we were unable to make a reasonably reliable estimate of when cash settlement with a taxing authority may occur in connection with our gross unrecognized tax benefit.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2019, our market risk related to interest rates on our cash and cash equivalents, and foreign currency exchange risks has not changed materially from the risks disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended June 29, 2019.

 

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Report, are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to reasonably ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended December 28, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

 

 

We are party to various litigation matters and claims arising from time to time in the ordinary course of business. While the results of such matters cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows.  

 

 

ITEM 1A. RISK FACTORS

There are no material changes to the Company’s risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended June 29, 2019.

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Our Board of Directors has cumulatively authorized $1.4 billion for our common stock repurchase program, which expires at the end of July 2021. As of December 31, 2019, the remaining amount authorized for the repurchase of our common stock was $190.6 million. During the three-month period ended December 31, 2019, there were no repurchases under our common stock repurchase program.

 

 

33


 

ITEM 6. EXHIBITS

 

2.1

 

Asset Purchase Agreement by and among Synaptics Incorporated and Creative Legend Investments Ltd.

 

 

 

10.1*

 

Employment Offer Letter, dated October 7, 2019 between the registrant and Dean Butler

 

 

 

10.2 (a)*

 

2019 Equity and Incentive Compensation Plan (1)

 

 

 

10.2 (b)*

 

Form of Restricted Stock Unit Award Agreement under the 2019 Equity and Incentive Compensation Plan (1)

 

 

 

10.2 (c)*

 

Form of Performance Stock Unit Award Agreement under the 2019 Equity and Incentive Compensation Plan (1)

 

 

 

10.2 (d)*

 

Form of Market Stock Unit Award Agreement under the 2019 Equity and Incentive Compensation Plan (1)

 

 

 

10.3

 

2019 Employee Stock Purchase Plan (1)

 

 

 

31.1

 

Certification of Chief Executive Officer

 

 

 

31.2

 

Certification of Chief Financial Officer

 

 

 

32.1**

 

Section 1350 Certification of Chief Executive Officer

 

 

32.2**

 

Section 1350 Certification of Chief Financial Officer

 

 

101.INS Inline

 

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

 

101.SCH Inline

 

XBRL Taxonomy Extension Schema Document

 

 

101.CAL Inline

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF Inline

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB Inline

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE Inline

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

(1)

Incorporated by reference to the registrant’s Form S-8 as filed with the Securities and Exchange Commission on November 1, 2019.

*

Indicates a contract with management or compensatory plan or arrangement.

**

This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

 

34


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

SYNAPTICS INCORPORATED

 

 

 

 

Date:  February 6, 2020

 

 

 

By:

 

/s/ Michael E. Hurlston

 

 

 

 

Name:

 

Michael E. Hurlston

 

 

 

 

Title:

 

President and Chief Executive Officer

 

 

 

 

 

Date:  February 6, 2020

 

 

 

By:

 

/s/ Dean Butler

 

 

 

 

Name:

 

Dean Butler

 

 

 

 

Title:

 

Senior Vice President and Chief Financial Officer

 

Date:  February 6, 2020

 

 

 

By:

 

/s/ Kermit Nolan

 

 

 

 

Name:

 

Kermit Nolan

 

 

 

 

Title:

 

Corporate Vice President and Chief Accounting Officer

 

35