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SYNA > SEC Filings for SYNA > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for SYNAPTICS INC

Form 10-Q for SYNAPTICS INC


2-Nov-2012

Quarterly Report


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

Forward-Looking Statements and Factors That May Affect Results

You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and notes in Item 1 and with our audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

In addition to the historical information contained in this report, this report may contain forward-looking statements, including those related to our operating model and strategies; our market penetration and market share in the PC and mobile product markets; competitive factors in the PC and mobile product markets; revenue from the PC and mobile product markets; industry estimates of growth rates of these markets; average selling prices; product design mix; manufacturing costs; gross margins; new product solution introductions; customer relationships; research and development expenses; selling, general, and administrative expenses; liquidity and anticipated cash requirements; our ability to provide local sales, operational, and engineering support to customers; our assessment of the combination of the added value we bring to our OEM customers' products in meeting their custom design requirements and the impact of our ongoing cost-improvement programs; and our expectations regarding the timing of the conclusion of an ongoing appeal of a tax audit. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially.

We caution that these statements are qualified by various factors that may affect future results, including the following: economic conditions; changes in the market for our products and the success of our customers' products; our success in moving products from the design phase into the manufacturing phase; changes in the competitive environment; infringement claims; warranty obligations related to product failures; the failure of key technologies to deliver commercially acceptable performance; our dependence on certain key markets; penetration into new markets; the absence of both long-term purchase and supply commitments; and our lengthy development and product acceptance cycles. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, including particularly Item 1A-Risk Factors.

Overview

We are a leading worldwide developer and supplier of custom-designed human interface solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing, communications, entertainment, and other electronic devices. We believe our results to date reflect the combination of our customer focus, the strength of our intellectual property, and our engineering know-how, which allow us to develop or engineer products that meet the demanding design specifications of OEMs.

Many of our customers have manufacturing operations in China, and many of our OEM customers have established design centers in that region. With our expanded global presence, including offices in China, Finland, Hong Kong, 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 do not have any long-term supply contracts with any of our contract manufacturers. We use two third-party wafer manufacturers to supply wafers and one third-party packaging manufacturer 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, 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, yield losses, and any inventory provisions or write-downs to cost of revenue.


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Our gross margin generally reflects the combination of the added value we bring to our OEM customers' products in 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 research and development expenses include costs for supplies and materials related to product development as well as the engineering costs incurred to design human interface solutions for OEM customers prior to and after their commitment to incorporate those solutions into their products. These expenses have generally increased, reflecting our continuing commitment 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. These expenses have generally increased, primarily reflecting incremental staffing and related support costs associated with our business acquisitions, increased business levels, growth in our existing markets, and penetration into new markets.

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the three months ended September 30, 2012 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 30, 2012.


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Results of Operations

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



                                                        Three Months Ended September 30,
                                              2012            2011          $ Change        % Change
PC applications                             $  62,425       $  68,831       $  (6,406 )          (9.3 %)
Mobile product applications                    64,616          64,615               1             0.0 %

Net revenue                                   127,041         133,446          (6,405 )          (4.8 %)

Gross margin                                   60,570          61,260            (690 )          (1.1 %)

Operating expenses:
Research and development                       32,802          28,226           4,576            16.2 %
Selling, general, and administrative           18,908          16,709           2,199            13.2 %
Amortization of acquired intangibles              240              -              240             n/m (1)
Change in contingent consideration                287              -              287             n/m (1)

Operating income                                8,333          16,325          (7,992 )         (49.0 %)

Interest income                                   218             200              18             9.0 %
Interest expense                                   (4 )            (4 )            -              0.0 %
Impairment recovery on investments, net            -               20             (20 )        (100.0 %)

Income before provision for income taxes        8,547          16,541          (7,994 )         (48.3 %)
Provision for income taxes                      2,494           3,526          (1,032 )         (29.3 %)

Net income                                  $   6,053       $  13,015       $  (6,962 )         (53.5 %)

(1) not meaningful

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

                                                                          Percentage
                                               Three Months Ended            Point
                                                  September 30,            Increase/
                                               2012           2011        (Decrease)
  PC applications                                 49.1 %        51.6 %           (2.5 %)
  Mobile product applications                     50.9 %        48.4 %            2.5 %

  Net revenue                                    100.0 %       100.0 %

  Gross margin                                    47.7 %        45.9 %            1.8 %

  Operating expenses:
  Research and development                        25.8 %        21.2 %            4.6 %
  Selling, general, and administrative            14.9 %        12.5 %            2.4 %
  Amortization of acquired intangibles             0.2 %          -               n/m (1)
  Change in contingent consideration               0.2 %          -               n/m (1)

  Operating income                                 6.6 %        12.2 %           (5.6 %)

  Income before provision for income taxes         6.7 %        12.4 %           (5.7 %)

  Provision for income taxes                       2.0 %         2.6 %           (0.6 %)

  Net income                                       4.8 %         9.8 %           (5.0 %)

(1) not meaningful


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Net Revenue.

Net revenue was $127.0 million for the quarter ended September 30, 2012 compared with $133.4 million for the quarter ended September 30, 2011, a decrease of $6.4 million, or 4.8%. Of our first quarter fiscal 2013 net revenue, $62.4 million, or 49.1%, was from PC applications and $64.6 million, or 50.9%, was from mobile product applications. The decrease in net revenue for the quarter ended September 30, 2012 was attributable to a decrease in net revenue from PC applications. Net revenue from PC applications decreased primarily as a result of lower unit sales in the quarter.

Based on industry estimates of unit shipments, the notebook market is anticipated to increase approximately 10% and the mobile smartphone market is anticipated to increase approximately 26% in calendar year 2013 compared with calendar year 2012.

Gross Margin.

Gross margin as a percentage of net revenue was 47.7%, or $60.6 million, for the quarter ended September 30, 2012 compared with 45.9%, or $61.3 million, for the quarter ended September 30, 2011. The 180 basis point improvement in gross margin was primarily attributable to favorable mix of higher margin mobile product application revenue driven in part by the continued shift in mobile product revenue from lower margin full sensor module solutions to higher margin chip or tail solutions.

We continuously introduce new product solutions, many of which have life cycles of less than a year. Further, as we sell our capacitive sensing technology 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 and independent of the vertical markets that our products serve. As a virtual manufacturer, our gross margin percentage is generally not impacted materially by our shipment volume. We charge 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 increased $4.6 million to $32.8 million for the quarter ended September 30, 2012 compared with the quarter ended September 30, 2011. The increase in research and development expenses primarily reflected a $2.9 million increase in employee-related costs, which included our annual merit increase and additional headcount associated with our recent acquisitions, a $555,000 increase in infrastructure related costs, and a $528,000 increase in temporary employee expenses.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $2.2 million to $18.9 million for the quarter ended September 30, 2012 compared with the quarter ended September 30, 2011. The increase in selling, general, and administrative expenses primarily reflected a $1.0 million increase in employee-related costs, which included our annual merit increase and additional headcount associated with our recent acquisitions, a $504,000 increase in support costs, as well as severance costs related to a separation agreement with a former executive vice president.

Provision for Income Taxes.

We account for income taxes under the asset and liability method. We consider the operating earnings of our foreign subsidiaries to be indefinitely invested outside the United States. Accordingly, no provision has been made for the U.S. federal, foreign, or state taxes that may result from future remittances of undistributed earnings of our foreign subsidiaries.

The provision for income taxes of $2.5 million and $3.5 million for the three months ended September 30, 2012 and 2011, respectively, represented estimated U.S. federal, foreign, and state income taxes. The effective tax rate for the three months ended September 30, 2012 was 29.2% and diverged from the combined federal and state statutory rate primarily because of foreign income taxed at lower tax rates, partially offset by foreign withholding taxes, net unrecognized tax benefits associated with qualified stock options, and an increase to the liability for uncertain tax positions. The effective tax rate for the three months ended September 30, 2011 was 21.3% and diverged from the combined federal and state statutory rate primarily because of foreign income taxed at lower tax rates and the federal and state research credit, partially offset by foreign withholding taxes and net unrecognized tax benefits associated with qualified stock options.


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Tax benefit associated with share-based compensation was $2.2 million and $2.0 million for the three months ended September 30, 2012 and 2011, respectively. Excluding the impact of share-based compensation and the related tax benefit, the effective tax rate for the three months ended September 30, 2012 and 2011 would have been 27.7% and 22.4%, respectively.

In May 2011, we were notified by the Internal Revenue Service that our fiscal 2003 through 2006 and fiscal 2008 through 2010 would be subject to an audit. The early periods are being audited in connection with a mandatory review of tax refunds in excess of $2.0 million when we carried back our fiscal 2008 net operating loss. In October 2012, we received the final examination report with a total proposed tax deficiency of $2.0 million over the examination periods, excluding interest and penalties. We filed a protest in October 2012 and contested the proposed adjustments through the appeals process. While we believe our unrecognized tax benefits associated with the years and issues under appeal are adequate, we can make no assurances that an appeals settlement, if any, will not exceed our accrued unrecognized tax benefits.

We anticipate the appeals process will extend into our fiscal 2014 and could result in a change to our unrecognized tax benefits. Any prospective adjustments to our unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and cause a corresponding change to our effective tax rate. Accordingly, our effective tax rate could fluctuate materially from period to period.

Liquidity and Capital Resources

Our cash and cash equivalents were $312.9 million as of September 30, 2012 compared with $305.0 million as of June 30, 2012, an increase of $7.9 million. The increase reflects the combination of $29.6 million provided from operating cash flows and $2.0 million of proceeds from the sales and maturities of non-current investments, partially offset by $16.1 million used for the purchase of property and equipment, $5.0 million used for the acquisition of a business, and $2.6 million used to repurchase 85,141 shares of our common stock. We consider earnings of our foreign subsidiaries indefinitely invested overseas and have made no provision for income or withholding taxes that may result from a future repatriation of those earnings. As of September 30, 2012, $273.9 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. federal, foreign, and state taxes to repatriate these funds.

Cash Flows from Operating Activities. Operating activities during the three months ended September 30, 2012 generated net cash of $29.6 million compared with $31.1 million of net cash generated during the three months ended September 30, 2011. The net change in operating assets and liabilities was primarily attributable to net income of $6.0 million plus adjustments for non-cash charges of $10.1 million, and a $13.5 million net change in operating assets and liabilities. The net change in operating assets and liabilities was primarily attributable to a $6.1 million decrease in accounts receivable, an $8.5 million increase in other accrued liabilities, partially offset by a $4.5 million decrease in accounts payable. Our days sales outstanding increased from 68 to 69 days from June 30, 2012 to September 30, 2012, and our annual inventory turns remained unchanged at 9.

Cash Flows from Investing Activities. Our investing activities primarily relate to purchases of property and equipment. Investing activities during the three months ended September 30, 2012 used net cash of $19.1 million compared with $3.4 million during the three months ended September 30, 2011. During the three months ended September 30, 2012, net cash used in investing activities consisted of $16.1 million used for the purchase of property and equipment (which included $11.9 million for the purchase of buildings and land), $5.0 million used for the acquisition of a business, partially offset by proceeds of $2.0 million from the sale and redemption of non-current investments.

Cash Flows from Financing Activities. Net cash used in financing activities for the three months ended September 30, 2012 was $2.6 million compared with $33.4 million for the three months ended September 30, 2011. Net cash used in financing activities for the three months ended September 30, 2012 included $2.6 million used to repurchase 85,141 shares of our common stock.

Common Stock Repurchase Program. In October 2011, our Board of Directors approved an additional $100.0 million for our stock repurchase program, expiring in October 2013, bringing the cumulative authorization to $520.0 million. 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 is based on the level of our cash balances, general business and market conditions, and other factors, including alternative investment opportunities. Common stock purchased under this program is held as treasury stock. From April 2005 through September 30, 2012, we purchased 15,869,233 shares of our common stock in the open market for an aggregate cost of $416.4 million. Treasury shares purchased prior to August 28, 2008 were not subject to the stock split on that date. As of September 30, 2012, we had $103.6 million remaining under our common stock repurchase program.


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Bank Credit Facility. We currently maintain a $50.0 million working capital line of credit with Wells Fargo Bank. The Wells Fargo Bank revolving line of credit, which expires on September 1, 2013, provides for an interest rate equal to the prime lending rate or 250 basis points above LIBOR, depending on whether we choose a variable or fixed rate, respectively. We had not borrowed any amounts under the line of credit as of September 30, 2012.

$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 generally will be freely tradeable after their issuance under Rule 145 of the Securities Act unless held by an affiliate of the acquired company, in which case such shares will be subject to the volume and manner of sale restrictions of Rule 144.

Liquidity and Capital Resources. We believe our existing cash and cash equivalents and anticipated cash flows from operating activities will be sufficient to meet our working capital and other cash requirements 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 related to protecting our intellectual property, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, the costs of maintaining sufficient space or renovating recently acquired building space for our expanding 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.

Our non-current investments consist of ARS investments, which have failed to settle in auctions. These investments are not liquid, and in the event we need to access these funds, we will not be able to do so without a loss of principal, unless redeemed by the issuers or a future auction on these investments is successful.

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 lack of liquidity on these investments will affect our ability to operate our business as usual. Further, we do not anticipate the need to remit any undistributed earnings of our foreign subsidiaries to meet our working capital and other cash requirements.

Contractual Obligations and Commercial Commitments

Our material contractual obligations and commercial commitments were presented as of June 30, 2012 in our Annual Report on Form 10-K for the fiscal year then ended. Except as discussed below, there have been no material changes in those obligations during the first three months of fiscal 2013.

We have unrecognized tax benefits of $23.7 million. We were previously under audit by a tax agency and we received the final examination report in October 2012. In response to the final examination report, we filed a protest in October 2012 and contested the proposed adjustments through the appeals process. While we believe our unrecognized tax benefits associated with the years and issues under appeal are adequate, we can make no assurances that an appeals settlement, if any, will not exceed our accrued unrecognized tax benefits. We anticipate the appeals process will extend into our fiscal 2014.

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