e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
Commission file number 000-49602
SYNAPTICS INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware
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77-0118518 |
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(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
3120 Scott Blvd., Suite 130
Santa Clara, California 95054
(Address of principal executive offices) (Zip code)
(408) 454-5100
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Number of shares of Common Stock outstanding at May 4, 2007: 25,658,837
SYNAPTICS INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
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March 31, |
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June 30, |
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2007 |
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2006 |
|
ASSETS |
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|
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Current assets: |
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|
|
|
|
|
|
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Cash and cash equivalents |
|
$ |
47,456 |
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|
$ |
38,724 |
|
Short-term investments |
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197,771 |
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206,452 |
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Accounts receivable, net of allowances of $419 and $189,
respectively |
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|
49,103 |
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|
|
34,034 |
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Inventories |
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|
9,125 |
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|
10,010 |
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Income taxes receivable |
|
|
8,736 |
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|
|
|
|
Prepaid expenses and other current assets |
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|
4,324 |
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|
3,407 |
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|
|
|
|
|
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Total current assets |
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316,515 |
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|
|
292,627 |
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Property and equipment, net |
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18,252 |
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|
16,038 |
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Goodwill |
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|
1,927 |
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|
1,927 |
|
Other assets |
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17,252 |
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|
|
20,829 |
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|
|
|
|
|
|
|
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$ |
353,946 |
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|
$ |
331,421 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
18,186 |
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$ |
16,542 |
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Accrued compensation |
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|
4,343 |
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|
4,842 |
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Income taxes payable |
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|
8,153 |
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|
8,078 |
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Other accrued liabilities |
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|
8,343 |
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|
5,377 |
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Note payable to a related party |
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1,500 |
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|
|
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Total current liabilities |
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40,525 |
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34,839 |
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Note payable to a related party |
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|
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|
1,500 |
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Other liabilities |
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|
2,032 |
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|
|
3,040 |
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Convertible senior subordinated notes |
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|
125,000 |
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|
125,000 |
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Stockholders equity: |
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Common stock: |
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$0.001 par value; 60,000,000 shares authorized; 29,003,393
and 27,462,125 shares issued, respectively |
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29 |
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|
|
27 |
|
Additional paid-in capital |
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|
166,451 |
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134,217 |
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Less: 3,588,100 and 2,306,100 common treasury shares,
respectively, at cost |
|
|
(72,345 |
) |
|
|
(39,999 |
) |
Accumulated other comprehensive loss |
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|
(110 |
) |
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|
(464 |
) |
Retained earnings |
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|
92,364 |
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|
73,261 |
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|
|
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|
|
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Total stockholders equity |
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186,389 |
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|
|
167,042 |
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|
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|
|
|
|
|
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$ |
353,946 |
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|
$ |
331,421 |
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|
|
|
|
|
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|
See notes to condensed consolidated financial statement (unaudited).
3
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
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|
|
|
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Three Months Ended |
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Nine Months Ended |
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March 31, |
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March 31, |
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2007 |
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2006 |
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2007 |
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|
2006 |
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Net revenue |
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$ |
64,309 |
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$ |
40,365 |
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$ |
195,211 |
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|
$ |
140,645 |
|
Cost of revenue (1) |
|
|
39,162 |
|
|
|
22,257 |
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|
|
117,278 |
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|
|
76,694 |
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|
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Gross margin |
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25,147 |
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18,108 |
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|
77,933 |
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63,951 |
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Operating expenses: |
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Research and development (1) |
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9,485 |
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9,106 |
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28,631 |
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25,740 |
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Selling, general, and administrative (1) |
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9,339 |
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6,952 |
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26,067 |
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20,593 |
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Restructuring |
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|
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915 |
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|
|
|
|
|
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|
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|
|
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Total operating expenses |
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18,824 |
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|
16,058 |
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55,613 |
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46,333 |
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|
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Income from operations |
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|
6,323 |
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|
2,050 |
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|
|
22,320 |
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|
|
17,618 |
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Interest income |
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|
2,713 |
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|
|
2,179 |
|
|
|
8,230 |
|
|
|
5,631 |
|
Interest expense |
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|
(488 |
) |
|
|
(485 |
) |
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|
(1,463 |
) |
|
|
(1,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
8,548 |
|
|
|
3,744 |
|
|
|
29,087 |
|
|
|
21,795 |
|
Provision for income taxes |
|
|
2,913 |
|
|
|
2,121 |
|
|
|
9,984 |
|
|
|
9,857 |
|
|
|
|
|
|
|
|
|
|
|
|
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Net income |
|
$ |
5,635 |
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|
$ |
1,623 |
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|
$ |
19,103 |
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$ |
11,938 |
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Net income per share: |
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|
|
|
|
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|
|
|
|
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Basic |
|
$ |
0.22 |
|
|
$ |
0.07 |
|
|
$ |
0.75 |
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|
$ |
0.49 |
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|
|
|
|
|
|
|
|
|
|
|
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|
Diluted |
|
$ |
0.20 |
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|
$ |
0.06 |
|
|
$ |
0.67 |
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|
$ |
0.44 |
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Shares used
in computing net income per share: |
|
|
|
|
|
|
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|
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|
|
|
|
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|
Basic |
|
|
25,823 |
|
|
|
24,737 |
|
|
|
25,509 |
|
|
|
24,602 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Diluted |
|
|
29,592 |
|
|
|
29,201 |
|
|
|
29,512 |
|
|
|
29,002 |
|
|
|
|
|
|
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|
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|
(1) |
|
Amounts include share-based compensation costs as follows: |
|
|
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|
|
|
|
|
|
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|
Cost of revenue |
|
$ |
160 |
|
|
$ |
145 |
|
|
$ |
492 |
|
|
$ |
525 |
|
Research and development |
|
$ |
1,262 |
|
|
$ |
1,165 |
|
|
$ |
3,736 |
|
|
$ |
3,700 |
|
Selling, general, and administrative |
|
$ |
1,966 |
|
|
$ |
1,967 |
|
|
$ |
6,169 |
|
|
$ |
5,752 |
|
See notes to condensed consolidated financial statement (unaudited).
4
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,103 |
|
|
$ |
11,938 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Share-based compensation costs |
|
|
10,397 |
|
|
|
9,977 |
|
Deferred taxes from share-based compensation |
|
|
(1,106 |
) |
|
|
(1,964 |
) |
Tax benefit realized from share-based compensation |
|
|
7,843 |
|
|
|
4,717 |
|
Excess tax benefit from share-based compensation |
|
|
(7,246 |
) |
|
|
(3,962 |
) |
Depreciation of property and equipment |
|
|
1,637 |
|
|
|
1,208 |
|
Impairment of property and equipment |
|
|
102 |
|
|
|
|
|
Amortization of debt issuance costs |
|
|
645 |
|
|
|
645 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(15,069 |
) |
|
|
4,070 |
|
Inventories |
|
|
885 |
|
|
|
(2,915 |
) |
Prepaid expenses and other current assets |
|
|
(917 |
) |
|
|
(646 |
) |
Other assets |
|
|
4,038 |
|
|
|
(1,325 |
) |
Accounts payable |
|
|
1,644 |
|
|
|
1,617 |
|
Accrued compensation |
|
|
(553 |
) |
|
|
(749 |
) |
Income taxes |
|
|
(8,661 |
) |
|
|
(3,378 |
) |
Other accrued liabilities |
|
|
2,966 |
|
|
|
130 |
|
Other liabilities |
|
|
(1,008 |
) |
|
|
91 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
14,700 |
|
|
|
19,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
(197,307 |
) |
|
|
(188,081 |
) |
Proceeds from sales and maturities of short-term investments |
|
|
206,342 |
|
|
|
164,332 |
|
Purchases of property and equipment |
|
|
(3,953 |
) |
|
|
(2,379 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
5,082 |
|
|
|
(26,128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(32,346 |
) |
|
|
(18,819 |
) |
Proceeds from issuance of common stock upon exercise of options
and stock purchase plan |
|
|
14,050 |
|
|
|
6,553 |
|
Excess tax benefit from share-based compensation |
|
|
7,246 |
|
|
|
3,962 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(11,050 |
) |
|
|
(8,304 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
8,732 |
|
|
|
(14,978 |
) |
Cash and cash equivalents at beginning of period |
|
|
38,724 |
|
|
|
72,232 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
47,456 |
|
|
$ |
57,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
469 |
|
|
$ |
469 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
8,281 |
|
|
$ |
11,494 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements (unaudited).
..
5
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 (the SEC) and
U.S. generally accepted accounting principles. However, certain information or footnote
disclosures normally included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to such SEC rules and
regulations. In our opinion, the financial statements include all adjustments, which are of a
normal and recurring nature, 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 30, 2006.
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. Fiscal 2007
will be a 53-week period ending on June 30, 2007, and fiscal 2006 was a 52-week period ending on
June 24, 2006. The fiscal periods presented in this report were 13-week periods for the three
months ended March 31, 2007 and March 30, 2006 and 40-week and 39-week periods for the nine months
ended March 31, 2007 and March 30, 2006, respectively. For ease of presentation, the accompanying
consolidated financial statements have been shown as ending on June 30 and calendar quarter end
dates for all annual, interim, and quarterly financial statement captions, unless otherwise
indicated.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally
accepted accounting principles 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, product warranty,
share-based compensation costs, provision for income taxes, income taxes payable, and
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.
2. Revenue Recognition
We recognize revenue from product sales when there is persuasive evidence that an arrangement
exists, delivery has occurred and title has transferred, the price is fixed or determinable, and
collection is reasonably assured. We accrue for estimated sales returns and other allowances,
based on historical experience, at the time we recognize revenue, which is typically upon shipment.
We record contract revenue for research and development as we provide the services under the terms
of the contract. We recognize non-refundable contract fees for which no further performance
obligations exist and for which there is no continuing involvement by us on the earlier of when the
payments are received or when collection is reasonably assured.
3. Net Income Per Share
Basic net income per share amounts for each period presented were computed using the weighted
average number of shares of common stock outstanding. Diluted net income per share amounts for
each period presented were computed (1) using the weighted average number of potentially dilutive
shares issuable in connection with stock options under the treasury stock method, and (2) using the
weighted average number of shares issuable in connection with convertible debt under the
if-converted method, when dilutive.
6
The following table presents the computation of basic and diluted net income per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income |
|
$ |
5,635 |
|
|
$ |
1,623 |
|
|
$ |
19,103 |
|
|
$ |
11,938 |
|
Interest expense and amortization of debt issuance
costs on convertible notes (net of tax) |
|
|
266 |
|
|
|
266 |
|
|
|
798 |
|
|
|
798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income |
|
$ |
5,901 |
|
|
$ |
1,889 |
|
|
$ |
19,901 |
|
|
$ |
12,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares, basic |
|
|
25,823 |
|
|
|
24,737 |
|
|
|
25,509 |
|
|
|
24,602 |
|
Effect of dilutive share-based awards |
|
|
1,295 |
|
|
|
1,990 |
|
|
|
1,529 |
|
|
|
1,926 |
|
Effect of convertible notes |
|
|
2,474 |
|
|
|
2,474 |
|
|
|
2,474 |
|
|
|
2,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares, diluted |
|
|
29,592 |
|
|
|
29,201 |
|
|
|
29,512 |
|
|
|
29,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.22 |
|
|
$ |
0.07 |
|
|
$ |
0.75 |
|
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.20 |
|
|
$ |
0.06 |
|
|
$ |
0.67 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive net income per share does not include the effect of 2,300,946, 1,895,999,
2,531,225, and 2,034,030 share-based awards that were outstanding during the three months ended
March 31, 2007 and 2006 and the nine months ended March 31, 2007 and 2006, respectively. These
share-based awards were not included in the computation of diluted net income per share because the
proceeds received, if any, from such share-based awards combined with the average unamortized
compensation costs adjusted for the hypothetical tax benefit or deficiency creditable or
chargeable, respectively, to additional paid-in capital, were greater than the average market price
of our common stock, and therefore, their effect would have been antidilutive.
In April 2007, we made an irrevocable election to cash settle the principal amount of our
convertible notes upon conversion of the notes. Our election to cash settle the principal amount
of our convertible notes upon conversion will result in us using the treasury stock method for
calculating diluted shares. Accordingly, we will include on a prospective basis diluted shares
underlying the convertible notes in our diluted earnings per share calculation only when the
average closing stock price for the period exceeds the conversion price of the notes, which is
currently $50.53 per share.
4. Cash Equivalents and Short-Term Investments
Cash equivalents consist of highly liquid investments with original maturities of three months
or less. Short-term investments consist of marketable securities and are classified as securities
available for sale under Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Such securities are reported
at fair value, with unrealized gains and losses, net of taxes, excluded from earnings and shown
separately as a component of accumulated other comprehensive loss within stockholders equity. We
may pay a premium or receive a discount upon the purchase of marketable securities. Interest
earned on marketable securities and amortization of discounts received and accretion of premiums
paid on the purchase of marketable securities are included in interest income. We determine
realized gains and losses on the sale of marketable securities using the specific identification
method.
7
5. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market (estimated
net realizable value) and consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Raw materials |
|
$ |
6,700 |
|
|
$ |
9,743 |
|
Finished goods |
|
|
2,425 |
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
$ |
9,125 |
|
|
$ |
10,010 |
|
|
|
|
|
|
|
|
Periodically, we purchase inventory from our subcontractors when a customers delivery
schedule is delayed or a customers order is cancelled. In those circumstances in which our
customer has cancelled its order and we purchase inventory from our subcontractors, we consider a
write-down to reduce the carrying value of the inventory purchased to its net realizable value. We
charge write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory
to net realizable value to cost of revenue.
6. Product Warranties, Indemnifications, and Legal Proceedings
Product Warranties
We generally warrant our products for a period of 12 months or more from the date of sale and
estimate probable product warranty costs at the time we recognize revenue. Factors that affect our
warranty liability include historical and anticipated rates of warranty claims, materials usage,
and service delivery costs. Warranty costs incurred have not been material in recent years.
However, we assess the adequacy of our warranty obligations periodically and adjust the accrued
warranty liability on the basis of our estimates.
Changes in our accrued warranty liability (included in other accrued liabilities) for the
nine-month periods ended March 31, 2007 and 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Beginning accrued warranty |
|
$ |
357 |
|
|
$ |
369 |
|
Provision for product warranties |
|
|
539 |
|
|
|
609 |
|
Cost of warranty claims and settlements |
|
|
(470 |
) |
|
|
(665 |
) |
|
|
|
|
|
|
|
Ending accrued warranty |
|
$ |
426 |
|
|
$ |
313 |
|
|
|
|
|
|
|
|
Indemnifications
In connection with certain third-party agreements, we are obligated to indemnify the third
party in connection with any technology infringement by us. We have also entered into
indemnification agreements with our officers and directors. Maximum potential future payments
cannot be estimated because these agreements 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 consolidated financial statements for such indemnification
obligations.
Legal Proceedings
In March 2006, Elantech Devices Corporation (Elantech) filed a Complaint for Patent
Infringement against us claiming that we infringed one of its patents and seeking damages,
attorneys fees, and a permanent injunction against us infringing or inducing others to infringe
the patent. In April 2006, we filed our Answer to the Complaint and Counterclaims against Elantech
claiming that Elantech has infringed and induced infringement of four of our patents and seeking
damages, attorneys fees, and a permanent injunction against infringing or inducing others to
infringe.
Elantech responded to our counterclaim denying liability and counterclaimed seeking an
injunction and damages for alleged violations of California law. We subsequently filed a motion to
dismiss the Elantech counterclaims that was granted in July 2006 with leave to amend the
counterclaims after the adjudication of the patent infringement claims. We intend to vigorously
defend our patents and pursue our counterclaims. We have not recorded
8
any liability associated
with Elantechs claims and have expensed as incurred all legal fees associated with the legal
proceedings.
7 . Convertible Senior Subordinated Notes
During December 2004, we issued an aggregate of $125 million of 0.75% Convertible Senior
Subordinated Notes maturing December 1, 2024 (the Notes) in a private offering pursuant to Rule
144A under the Securities Act of 1933, as amended. In connection with issuing the Notes, we
incurred debt issuance costs of $4.3 million, consisting primarily of the initial purchasers
discount and costs related to legal, accounting, and printing, which are being amortized over five
years. We expect to use the net proceeds for working capital and general corporate purposes and
potentially for future acquisitions.
The Notes bear interest at a rate of 0.75% per annum payable on December 1 and June 1 of each
year. However, we will pay additional contingent interest on the Notes if the average trading
price of the Notes is at or above 120% of the principal amount of the Notes for a specified period
beginning with the six-month period commencing December 1, 2009. The amount of contingent interest
payable on the Notes with respect to a six-month period, for which contingent interest applies,
will equal 0.375% per annum of the average trading price of the Notes for a specified five
trading-day period preceding such six-month period.
The Notes are convertible into shares of our common stock, initially at a conversion rate of
19.7918 shares per $1,000 principal amount of Notes, or a total of 2,473,975 shares of common
stock, which is equivalent to an initial conversion price of approximately $50.53 per share of
common stock, subject to adjustment in certain events. The denominator of the diluted net income
per share calculation includes the weighted average effect of the 2,473,975 shares of common stock
issuable upon conversion of the Notes in accordance with SFAS 128 as it applies to the method of
settling the principal amount of the notes and Emerging Issues Task Force (EITF) Issue No. 04-08
as it applies to the market price conversion trigger embedded in the notes. Through November 30,
2009, upon the occurrence of a fundamental change as defined in the indenture governing the Notes,
we could potentially be obligated to issue up to 27.7085 shares per $1,000 of principal amount of
Notes, or a total of 3,463,562 shares of common stock, which is equivalent to a conversion price of
$36.09 per share of common stock. The additional 989,587 shares, contingently issuable upon a
fundamental change, are not included in the calculation of diluted net income per share.
The Notes may be converted (1) if, during any calendar quarter commencing after December 31,
2004, the last reported sale price of our common stock for at least 20 trading days in the period
of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is
greater than or equal to 120% of the applicable conversion price on such last trading day; (2) on
or after January 1, 2020; (3) if we have called the Notes for redemption; or (4) during prescribed
periods, upon the occurrence of specified corporate transactions or fundamental changes. On or
after December 1, 2009, we may redeem for cash all or a portion of the notes at a redemption price
of 100% of the principal amount of the notes plus accrued and unpaid interest, including contingent
interest and additional interest, if any. Noteholders have the right to require us to repurchase
all or a portion of their notes for cash on December 1, 2009, December 1, 2014, and December 1,
2019 at a price equal to 100% of the principal amount of the notes to be purchased plus accrued and
unpaid interest, including contingent interest and additional interest, if any.
In April 2007, we made an irrevocable election to cash settle the principal amount of our
convertible notes upon conversion of the notes. Our election to cash settle the principal amount
of our convertible notes upon conversion will result in us using the treasury stock method for
calculating diluted shares. Accordingly, we will include on a prospective basis diluted shares
underlying the convertible notes in our diluted earnings per share calculation only when the
average closing stock price for the period exceeds the conversion price of the notes, which is
currently $50.53 per share. As of March 31, 2007, none of the conditions for conversion of the
Notes had occurred.
The Notes are unsecured senior subordinated obligations and rank junior in right of payment to
all of our existing and future senior indebtedness, equal in right of payment with all of our
existing and future indebtedness or other obligations that are not, by their terms, either senior
or subordinated to the Notes, including trade debt and other general unsecured obligations that do
not constitute senior or subordinated indebtedness, and senior in right of payment to all of our
future indebtedness that, by its terms, is subordinated to the Notes. There are no financial
covenants in the Notes.
Interest expense includes the amortization of debt issuance costs. We recorded $449,000 of
interest expense on the Notes during each of the three-month periods ended March 31, 2007 and 2006,
and $1.3 million during each of the nine-month periods ended March 31, 2007 and 2006.
9
8. Share-Based Compensation
The purpose of our various share-based compensation plans is to attract, motivate, retain, and
reward high-quality employees, directors, and consultants by enabling such persons to acquire or
increase their proprietary interest in our common stock in order to strengthen the mutuality of
interests between such persons and our stockholders and to provide such persons with annual and
long-term performance incentives to focus their best efforts in the creation of stockholder value.
Consequently, share-based compensatory awards issued subsequent to the initial award to our
employees and consultants are determined primarily on individual performance. Our share-based
compensation plans with outstanding awards consist of our 1996 Stock Option Plan, our 2000
Nonstatutory Stock Option Plan, our 2001 Incentive Compensation Plan, and our 2001 Employee Stock
Purchase Plan.
Share-based compensation awards available for grant or issuance for each plan as of the
beginning of the fiscal year, including changes in the balance of awards available for grant during
the nine months ended March 31, 2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
|
|
Available |
|
|
1996 |
|
|
2000 |
|
|
2001 |
|
|
Employee |
|
|
|
Under All |
|
|
Stock |
|
|
Nonstatutory |
|
|
Incentive |
|
|
Stock |
|
|
|
Share-Based |
|
|
Option |
|
|
Stock Option |
|
|
Compensation |
|
|
Purchase |
|
|
|
Award Plans |
|
|
Plan |
|
|
Plan |
|
|
Plan |
|
|
Plan |
|
Balance at June 30, 2006 |
|
|
3,292,246 |
|
|
|
226,465 |
|
|
|
37,584 |
|
|
|
2,414,826 |
|
|
|
613,371 |
|
Additional shares authorized |
|
|
1,144,469 |
|
|
|
|
|
|
|
|
|
|
|
1,144,469 |
|
|
|
|
|
Stock options granted |
|
|
(866,048 |
) |
|
|
|
|
|
|
|
|
|
|
(866,048 |
) |
|
|
|
|
Deferred stock units granted |
|
|
(168,329 |
) |
|
|
|
|
|
|
|
|
|
|
(168,329 |
) |
|
|
|
|
Purchases under employee
stock purchase plan |
|
|
(105,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105,004 |
) |
Forfeited and expired |
|
|
245,678 |
|
|
|
2,926 |
|
|
|
|
|
|
|
242,752 |
|
|
|
|
|
Plan shares expired |
|
|
(229,391 |
) |
|
|
(229,391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
3,313,621 |
|
|
|
|
|
|
|
37,584 |
|
|
|
2,767,670 |
|
|
|
508,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 1996 Stock Option Plan (1996 Plan) expired in December 2006. Accordingly, plan
shares available under the 1996 Plan that had not been granted prior to the expiration of the plan
have expired and no new grants can be issued under the 1996 Plan. Option awards that are currently
outstanding under the 1996 Plan will remain outstanding unless exercised, forfeited, or cancelled
under the terms of the option grant agreements.
We adopted SFAS No. 123R, Share-Based Payment (SFAS 123R), in fiscal 2006 and applied the
provisions of Staff Accounting Bulletin No. 107, Share-Based Payment, to our existing share-based
compensation plans in accordance with the modified prospective transition method. Previously, we
followed Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for employee share-based compensation, as
permitted by SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123), and we did not
recognize compensation expense for stock option grants to employees and directors with an exercise
price equal to the fair market value of the shares at the date of grant. Accordingly, no
share-based compensation costs based on grant date fair value were included in our consolidated
statements of income for any period prior to fiscal 2006.
Share-based compensation and the related tax benefit recognized in our consolidated statements
of income for the three and nine months ended March 31, 2007 and 2006 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Cost of revenue |
|
$ |
160 |
|
|
$ |
145 |
|
|
$ |
492 |
|
|
$ |
525 |
|
Research and development |
|
|
1,262 |
|
|
|
1,165 |
|
|
|
3,736 |
|
|
|
3,700 |
|
Selling, general, and administrative |
|
|
1,966 |
|
|
|
1,967 |
|
|
|
6,169 |
|
|
|
5,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,388 |
|
|
$ |
3,277 |
|
|
$ |
10,397 |
|
|
$ |
9,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit recorded on share-based compensation |
|
$ |
896 |
|
|
$ |
771 |
|
|
$ |
2,775 |
|
|
$ |
2,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
We utilize the Black-Scholes option pricing model to estimate the grant date fair value
of certain employee share-based compensatory awards, which requires the input of highly subjective
assumptions, including expected volatility and expected life. Historical and implied volatilities
were used in estimating the fair value of our share-based awards, while the expected life of our
options was estimated to be five years based on historical trends since our initial public
offering. Further, as required under SFAS 123R, we now estimate forfeitures for share-based awards
that are not expected to vest. Changes in these inputs and assumptions can materially affect the
measure of estimated fair value of our share-based compensation. We charge the estimated fair
value to earnings on a straight-line basis over the vesting period of the underlying awards, which
is generally four years for our stock option and deferred stock unit awards and up to two years for
our employee stock purchase plan. The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options having no vesting restrictions and being fully
transferable. As our stock option and employee stock purchase plan awards have characteristics
that differ significantly from traded options and, as changes in the subjective assumptions can
materially affect the estimated value, our estimate of fair value may not accurately represent the
value assigned by a third party in an arms-length transaction. While our estimate of fair value
and the associated charge to earnings materially affects our results of operations, it has no
impact on our cash position.
We account for stock options granted to consultants under our share-based compensation plans
at fair value determined by using the Black-Scholes option pricing model in accordance with EITF
Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or In Conjunction with Selling, Goods or Services. These awards are subject to
periodic revaluation over their vesting term, if any. The assumptions used to value share-based
awards to consultants are similar to those used for employees, except that we use the contractual
life of the award rather than the expected life.
In accordance with SFAS 123R, we recognize tax benefit upon expensing certain share-based
awards associated with our share-based compensation plans, including nonqualified stock options and
deferred stock unit awards, but under current accounting standards we cannot recognize tax benefit
concurrent with the recognition of share-based compensation expenses associated with incentive
stock options and employee stock purchase plan shares (qualified stock options). For qualified
stock options that vested after our adoption of SFAS 123R, we recognize tax benefit only in the
period when disqualifying dispositions of the underlying stock occur, which historically has been
up to several years after vesting and in a period when our stock price substantially increases.
For qualified stock options that vested prior to our adoption of SFAS 123R, the tax benefit is
recorded directly to additional paid-in capital. For the nine months ended March 31, 2007, we
realized tax benefit from non-qualified stock option exercises and disqualifying dispositions of
qualified stock options totaling $9.5 million, of which $440,000 of the tax benefit was recognized
as a reduction of the provision for income taxes, $1.2 million reduced deferred tax assets
established after our adoption of SFAS 123R, and the remaining $7.8 million of tax benefit was
recorded directly to additional paid-in capital.
We determine excess tax benefit using the long-haul method in which we compare the actual tax
benefit associated with the tax deduction from share-based award activity to the hypothetical tax
benefit on the grant date fair values of the corresponding share-based awards. Actual tax benefit
related to the tax deduction for share-based awards exceeded the hypothetical tax benefit on the
grant date fair values of the corresponding share-based awards resulting in excess tax benefit of
$7.2 million for the nine months ended March 31, 2007.
Historically, we have issued new shares in connection with our share-based compensation plans;
however, 3.6 million treasury shares were also available for issuance as of March 31, 2007. Any
additional shares repurchased under the stock repurchase program would be available for issuance
under our share-based compensation plans.
Deferred Stock Units
Our 2001 Incentive Compensation Plan (2001 Plan) provides for the grant of deferred stock
unit awards (DSUs) to our employees, consultants, and directors. A DSU is a promise to deliver
shares of our common stock at a
future date in accordance with the terms of the DSU grant agreement. We began granting DSU
awards in January 2006.
DSUs granted under the 2001 Plan generally vest 25% at the end of 12 months from the vesting
commencement date and at a rate of approximately 2% each month thereafter until fully vested at the
end of 48 months from the vesting commencement date. Delivery of shares under the plan takes place
quarterly for all DSUs vested as of the scheduled delivery dates. Until delivery of shares, the
grantee has no rights as a stockholder.
11
An election to defer delivery of the underlying shares for unvested DSU awards can be made
provided the deferral election is made at least one year before vesting and the deferral period is
at least five years from the scheduled delivery date.
The following table summarizes DSU activity, including DSUs granted, delivered, and forfeited
during the nine months ended March 31, 2007, and the balance and aggregate intrinsic value of DSUs
as of March 31, 2007. The aggregate intrinsic value is based on the closing price of our common
stock on March 30, 2007 of $25.58.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
Aggregate |
|
|
Weighted |
|
|
|
Stock Unit |
|
|
Intrinsic |
|
|
Average |
|
|
|
Awards |
|
|
Value |
|
|
Grant Date |
|
|
|
Outstanding |
|
|
(thousands) |
|
|
Fair Value |
|
Balance at June 30, 2006 |
|
|
38,280 |
|
|
|
|
|
|
$ |
29.68 |
|
Granted |
|
|
168,329 |
|
|
|
|
|
|
$ |
25.19 |
|
Delivered |
|
|
(6,986 |
) |
|
|
|
|
|
$ |
30.71 |
|
Forfeited |
|
|
(8,710 |
) |
|
|
|
|
|
$ |
24.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
190,913 |
|
|
$ |
4,884 |
|
|
$ |
25.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized share-based compensation costs for DSUs granted under the 2001 Plan were
approximately $3.8 million as of March 31, 2007, to be recognized over a weighted average period of
approximately three years.
Stock Options
Our share-based compensation plans with outstanding stock option awards include our 1996 Stock
Option Plan, our 2000 Nonstatutory Stock Option Plan, and our 2001 Incentive Compensation Plan
(the Plans). Under the Plans, we may grant employees, consultants, and directors incentive stock
options or nonqualified stock options to purchase shares of our common stock at not less than 100%
or 85% of the fair market value, respectively, on the date of grant.
Options issued under the Plans generally vest 25% at the end of 12 months from the vesting
commencement date and approximately 2% each month thereafter until fully vested at the end of 48
months from the vesting commencement date. Options not exercised ten years after the date of grant
are cancelled.
The following table summarizes stock option activity and weighted average exercise prices for
the nine months ended March 31, 2007, and for options outstanding, options vested and expected to
vest, and options exercisable, the weighted average exercise prices, the weighted average remaining
contractual life, and the aggregate intrinsic value as of March 31, 2007. The aggregate intrinsic
value is based on the closing price of our common stock on March 30, 2007 of $25.58 and excludes
the impact of options that were not in-the-money.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Option |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Awards |
|
|
Exercise |
|
|
Life |
|
|
Value |
|
|
|
Outstanding |
|
|
Price |
|
|
(years) |
|
|
(thousands) |
|
Balance at June 30, 2006 |
|
|
5,808,011 |
|
|
$ |
14.55 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
866,048 |
|
|
$ |
23.24 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,431,259 |
) |
|
$ |
8.50 |
|
|
|
|
|
|
|
|
|
Forfeited and expired |
|
|
(236,968 |
) |
|
$ |
20.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
5,005,832 |
|
|
$ |
17.50 |
|
|
|
7.2 |
|
|
$ |
44,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest |
|
|
4,736,606 |
|
|
$ |
17.16 |
|
|
|
7.1 |
|
|
$ |
43,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
2,707,822 |
|
|
$ |
12.96 |
|
|
|
5.9 |
|
|
$ |
35,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The following table summarizes cash received and the aggregate intrinsic value for stock
options exercised during the nine months ended March 31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Cash received |
|
$ |
12,162 |
|
|
$ |
4,908 |
|
Aggregate intrinsic value |
|
$ |
28,047 |
|
|
$ |
13,393 |
|
The grant date fair value of each award granted under the Plans during the nine months
ended March 31, 2007 was estimated at the date of grant using the Black-Scholes option pricing
model, assuming no expected dividends and the following range of assumptions:
|
|
|
|
|
Expected volatility |
|
|
54.3% - 60.5% |
|
Expected life in years |
|
|
5.0 |
|
Risk-free interest rate |
|
|
4.7% - 5.0% |
|
Grant date fair value per award |
|
|
$11.81-$15.93 |
|
The expected volatility is based on a weighting of implied and historical volatility; the
expected life is based on historical option exercise trends; and the risk free interest rate is
based on U. S. Treasury yields in effect at the time of grant for the expected life of the option.
Unrecognized share-based compensation costs for stock options granted under the Plans were
approximately $27.9 million as of March 31, 2007, to be recognized over a weighted average period
of approximately three years.
Employee Stock Purchase Plan
Our 2001 Employee Stock Purchase Plan (ESPP) became effective on January 29, 2002, the
effective date of the registration statement for our initial public offering. The ESPP allows
employees to designate up to 15% of their base compensation, subject to legal restrictions and
limitations, to purchase shares of common stock at 85% of the lesser of the fair market value
(FMV) at the beginning of the offering period or the exercise date. The offering period extends
for up to two years and includes four exercise dates occurring at six month intervals. Under the
terms of the plan, if the FMV at an exercise date is less than the FMV at the beginning of the
offering period, the current offering period will terminate and a new offering period of up to two
years will commence.
The following table summarizes shares purchased, weighted average purchase price, cash
received, and the aggregate intrinsic value for ESPP purchases during the nine months ended March
31, 2007 and 2006 (in thousands, except for shares purchased and weighted average purchase price):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Shares purchased |
|
|
105,004 |
|
|
|
93,020 |
|
Weighted average purchase price |
|
$ |
17.99 |
|
|
$ |
17.69 |
|
Cash received |
|
$ |
1,888 |
|
|
$ |
1,645 |
|
Aggregate intrinsic value |
|
$ |
794 |
|
|
$ |
488 |
|
In accordance with FASB Technical Bulletin No. 97-1, Accounting under Statement 123 for
Certain Employee Stock Purchase Plans with a Look-Back Option, the early termination of an
offering period followed by the
commencement of a new offering period represents a modification to the terms of the related
awards. Under the terms of our ESPP, the offering periods that commenced on January 1, 2005 and
2006 were terminated on June 30, 2005 and 2006 and new offering periods commenced on July 1, 2005
and 2006, respectively. The June 30, 2005 modification affected 169 employees, and the June 30,
2006 modification affected 13 employees. Both modifications resulted in
13
incremental compensation
costs that are being recognized on a straight-line basis over the period from the modification date
through June 30, 2007.
The grant date fair value of each award granted under our ESPP during the nine months ended
March 31, 2007 was estimated using the Black-Scholes option pricing model, assuming no expected
dividends and the following weighted average assumptions:
|
|
|
|
|
Expected volatility |
|
|
38.1% - 50.2% |
|
Expected life in years |
|
|
0.5 |
|
Risk-free interest rate |
|
|
5.1% |
|
Grant date fair value per award |
|
|
$7.93 |
|
The expected volatility is based on either implied volatility or a weighting of implied
and historical volatility; the expected life is based on each period that begins with the
enrollment date until each purchase date remaining in the offering period at the date of enrollment
in the plan; and the risk free interest rate is based on U. S. Treasury yields or yield curve in
effect for each expected life.
Unrecognized share-based compensation costs for awards granted under our ESPP were
approximately $287,000 as of March 31, 2007, and will be recognized over the remainder of fiscal
2007.
9. Income Taxes
We account for income taxes under the asset and liability method in accordance with SFAS No.
109 Accounting for Income Taxes. 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, state, or foreign taxes that may result from future remittances of undistributed
earnings of our foreign subsidiaries. We account for income tax contingencies in accordance with
SFAS No. 5, Accounting for Contingencies. Accordingly, our tax rate may be favorably or
unfavorably affected by the release or establishment, respectively, of tax contingency reserves
related to tax uncertainties.
The income tax provision of $2.9 million and $2.1 million for the three months ended March 31,
2007 and 2006, respectively, represented estimated federal, foreign, and state taxes. The
effective tax rate for the three months ended March 31, 2007 was 34.1% and diverged from the
combined federal and state statutory rate primarily due to the benefit of research tax credits and
the impact of tax-exempt interest income, partially offset by the impact of accounting for
share-based compensation and foreign withholding taxes. The effective tax rate for the three
months ended March 31, 2006 was 56.7% and diverged from the combined federal and state statutory
rate primarily as a result of the impact of accounting for share-based compensation and other
permanent taxable differences, partially offset by the impact of higher income from foreign
operations, the benefit of tax-exempt interest income, and research tax credits.
The income tax provision of $10.0 million and $9.9 million for the nine months ended March 31,
2007 and 2006, respectively, represented estimated federal, foreign, and state taxes. The
effective tax rate for the nine months ended March 31, 2007 was 34.3% and diverged from the
combined federal and state statutory rate primarily due to the benefit of research tax credits in
general, research tax credits generated from the retroactive extension of the federal research
credit signed into law in December 2006, the net release of contingency reserves, and the impact of
tax-exempt interest income, partially offset by the impact of accounting for share-based
compensation and foreign withholding taxes. The effective tax rate for the nine months ended March
31, 2006 was 45.2% and diverged from the combined federal and state statutory rate primarily as a
result of the impact of accounting for share-based compensation and other permanent taxable
differences, partially offset by the impact of higher income from foreign operations, the benefit
of tax-exempt interest income, and research tax credits.
10. Segment, Customers, and Geographic Information
We operate in one segment: the development, marketing, and sale of interactive user interface
solutions for electronic devices and products. We generate our revenue from two broad product
categories: the PC market and digital lifestyle product markets. The PC market accounted for 83%
and 90% of net revenue for the three months ended March 31, 2007 and 2006, respectively, and 83%
and 84% of net revenue for the nine months ended March 31, 2007 and 2006, respectively.
14
The following is a summary of net revenue from sales to unaffiliated customers within
geographic areas based on the customer location (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
China |
|
$ |
45,762 |
|
|
$ |
30,951 |
|
|
$ |
159,791 |
|
|
$ |
106,268 |
|
Taiwan |
|
|
13,511 |
|
|
|
4,124 |
|
|
|
19,727 |
|
|
|
18,784 |
|
Other |
|
|
5,036 |
|
|
|
5,290 |
|
|
|
15,693 |
|
|
|
15,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
64,309 |
|
|
$ |
40,365 |
|
|
$ |
195,211 |
|
|
$ |
140,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major customer net revenue data as a percentage of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Customer A |
|
|
15 |
% |
|
|
15 |
% |
|
|
15 |
% |
|
|
* |
|
Customer B |
|
|
14 |
% |
|
|
* |
|
|
|
12 |
% |
|
|
* |
|
Customer C |
|
|
10 |
% |
|
|
* |
|
|
|
* |
|
|
|
* |
|
Customer D |
|
|
* |
|
|
|
11 |
% |
|
|
11 |
% |
|
|
* |
|
Customer E |
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
16 |
% |
Major customer accounts receivable as a percentage of accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Customer A |
|
|
19 |
% |
|
|
18 |
% |
Customer B |
|
|
19 |
% |
|
|
* |
|
Customer C |
|
|
11 |
% |
|
|
11 |
% |
Customer D |
|
|
* |
|
|
|
11 |
% |
11. Comprehensive Income
Our comprehensive income consists of net income plus the effect of unrealized gains and losses
on our short-term investments due to interest rate fluctuations. The unrealized gains and losses
on our short-term investments are considered to be temporary in nature and were not material for
either the three or nine-month periods ended March 31, 2007 and 2006. Accordingly, comprehensive
income closely approximated net income. We use the United States dollar as the functional
currency in accounting for our foreign entities and recognize remeasurement adjustments in our
consolidated statement of income.
12. Restructuring Charge
We incurred a restructuring charge of $915,000 during the second quarter of fiscal 2007 in
connection with the closure of our United Kingdom office as part of our strategic efforts to
realign our development capabilities to meet the needs of our Asia Pacific customer base. We
accounted for our restructuring charge in accordance with SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities. Included in the restructuring charge were personnel
costs consisting of severance and relocation of $526,000, a lease reserve of $287,000, net of
estimated sublease income, and a non-cash impairment of property and equipment of $102,000. Cash
payments associated with the restructuring charge aggregated approximately $526,000 during the nine
months ended March 31, 2007.
15
13. Subsequent Events
Subsequent to March 31, 2007, our board of directors authorized an additional $80 million for
our stock repurchase program, raising the aggregate authorization level to $160 million and
extending the period for repurchase to April 2009. The program authorizes us to repurchase our
common stock on the open market or in privately negotiated transactions depending upon market
conditions and other factors.
In addition, on April 26, 2007, we made an irrevocable election to cash settle the principal
amount of our convertible notes upon conversion of the notes. Our election to cash settle the
principal amount of our convertible notes upon conversion will result in us using the treasury
stock method for calculating diluted shares. Accordingly, we will include on a prospective basis
diluted shares underlying the convertible notes in our diluted earnings per share calculation only
when the average closing stock price for the period exceeds the conversion price of the notes,
which is currently $50.53 per share.
14. Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, (FIN
48) that clarifies the accounting for uncertainty in income taxes recognized in an entitys
financial statements in accordance with SFAS No. 109. FIN 48 is designed to reduce the disparity
in accounting treatment for uncertain tax positions resulting from diverse interpretations of SFAS
109 among companies. FIN 48 prescribes a recognition threshold and measurement attribute for
financial statement disclosure of tax positions taken or expected to be taken on a tax return. FIN
48 is effective beginning in our first quarter of fiscal 2008. We expect the adoption of FIN 48
will result in certain presentation reclassifications on our balance sheet, but we do not expect a
material impact on our results of operations or cash flows.
In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin
No. 108, (SAB 108), which provides interpretive guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a current year
misstatement. SAB 108 provides transition guidance for correcting errors and requires registrants
to quantify misstatements using both the balance-sheet and income-statement approaches and to
evaluate whether either approach results in quantifying an error that is material in light of
relevant quantitative and qualitative factors. In the year of adoption only, if the effect is
determined to be material, SAB 108 allows registrants to record the effect as a cumulative-effect
adjustment to beginning-of-year retained earnings. SAB 108 does not change the requirements within
SFAS No. 154, Accounting Changes and Error Correctionsa replacement of APB No. 20 and FASB
Statement No. 3, for the correction of an error on financial statements. Further, SAB 108 does
not change the Staffs previous guidance in SAB 99 on evaluating the materiality of misstatements.
SAB 108 is effective for our fiscal 2007. We do not expect the adoption of SAB 108 to have a
material impact on our financial position, results of operations, or cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in U.S. generally
accepted accounting principles, and expands disclosure about fair value measurements. SFAS 157
applies under other accounting standards that require or permit fair value measurements.
Accordingly, SFAS 157 does not require any new fair value measurement. SFAS 157 is effective beginning in our first quarter of fiscal 2009. We do not expect the
adoption of SFAS 157 to have a material impact on our financial position, results of operations, or
cash flows.
16
ITEM 2. MANAGEMENTS 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 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 year ended June 30, 2006.
In addition to the historical information contained in this report, this report contains
forward-looking statements, including those related to market penetration and market share in the
notebook and digital lifestyle product markets; competition in the notebook and digital lifestyle
product markets; revenue from the notebook and digital lifestyle product markets; growth rates of
these markets; average selling prices; product design mix; manufacturing costs; cost-improvement
programs; gross margins; customer relationships; research and development expenses; selling,
general, and administrative expenses; legal proceedings; and liquidity and anticipated cash
requirements. 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: 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 year ended June
30, 2006, including particularly Item 1A Risk Factors.
Overview
We are a leading worldwide developer and supplier of custom-designed user interface solutions
that enable people to interact more easily and intuitively with a wide variety of mobile computing,
entertainment, communications, and other electronic devices. From our inception in 1986 through
fiscal 1995, we were a development stage company, focused on developing and refining our pattern
recognition and capacitive sensing technologies, and generated revenue by providing contract
engineering and design services. In fiscal 1996, we began shipping our proprietary TouchPad. We
are a leading supplier of interface solutions to the notebook computer market and the hard-disk
drive, or HDD, portable digital music player market. In fiscal 2006, we believe we were the market
leader in providing interface solutions for notebook computers and HDD portable digital music
players. We believe our market share results from the combination of our customer focus, the
strength of our intellectual property, and our engineering know-how, which allows us to design
products that meet the demanding design specifications of original equipment manufacturers, or
OEMs.
Our manufacturing operations are based on a virtual manufacturing model in which we outsource
all of our production requirements, eliminating the need for significant capital expenditures for
manufacturing facilities and equipment and allowing us to reduce our investment in inventories.
This approach requires us to work closely with our manufacturing subcontractors to ensure adequate
production capacity to meet our forecasted production requirements. We provide our manufacturing
subcontractors with six-month rolling forecasts and generally 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 manufacturing subcontractors. Currently, we use two third-party
manufacturers to provide our proprietary capacitive based ASICs, and 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, manufacturing, assembly, and test costs paid to third-party manufacturers and related
overhead costs associated with our manufacturing operations personnel. Additionally, all warranty
costs and any inventory provisions or write-downs are charged to cost of revenue.
Our gross margin generally reflects the combination of the added value we bring to our
customers products in meeting their custom design requirements and our ongoing cost-improvement
programs. These cost-improvement programs include reducing materials and component costs, assembly
and test costs, and implementing design and process improvements. As each product we sell utilizes
our capacitive sensing technology in a design that is generally unique or specific to a customers
application, gross margin varies on a product-by-product basis. Generally, our products, which
contain a higher percentage of third-party content, may have lower gross margins. Our newly
17
introduced products may have lower gross margins than our more mature products that have
realized greater benefits associated with our ongoing cost-improvement programs. As a result, new
product introductions may initially negatively impact our gross margins.
Our research and development expenses include costs for supplies and materials related to
product development, as well as the engineering costs incurred to design interface solutions for
customers prior to and after the customers 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 a leadership 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 increased business levels, anticipated
growth in our existing markets, and penetration into new markets.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with U.S. generally
accepted accounting principles 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, product warranty,
share-based compensation costs, provision for income taxes, income taxes payable, and
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.
The methods, estimates, interpretations, and judgments we use in applying our most critical
accounting policies can have a significant impact on the results that we report in our consolidated
financial statements. The SEC considers an entitys most critical accounting policies to be those
policies that are both most important to the portrayal of a companys financial condition and
results of operations and those that require managements most difficult, subjective, or complex
judgments, often as a result of the need to make estimates about matters that are inherently
uncertain when estimated. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue Recognition
We recognize revenue from product sales when there is persuasive evidence that an arrangement
exists, delivery has occurred or title has transferred, the price is fixed or determinable, and
collection is reasonably assured. We accrue for estimated sales returns and other allowances,
based on historical experience, at the time we recognize revenue, which is typically upon shipment.
We record contract revenue for research and development as we provide the services under the terms
of the contract. We recognize non-refundable contract fees for which no further performance
obligations exist and for which there is no continuing involvement by us on the earlier of when the
payments are received or when collection is assured.
Inventory
We state our inventories at the lower of cost or market. We base our assessment of the
ultimate realization of inventories on our projections of future demand and market conditions.
Sudden declines in demand, rapid product improvements, or technological changes, or any combination
of these factors can cause us to have excess or obsolete inventories. On an ongoing basis, we
review for estimated obsolete or unmarketable inventories and write down our inventories to their
net realizable value based upon our forecasts of future demand and market conditions. If actual
market conditions are less favorable than our forecasts, additional inventory reserves may be
required. The following factors influence our estimates: changes to or cancellations of customer
orders; unexpected decline in demand; rapid product improvements and technological advances; and
termination or changes by our OEM customers of any product offerings incorporating our product
solutions.
Periodically, we purchase inventory from our subcontractors when a customers delivery
schedule is delayed or a customers order is cancelled. In those circumstances in which our
customer has cancelled its order and we
18
purchase inventory from our subcontractors, we consider a write-down to reduce the carrying
value of the inventory purchased to its net realizable value. We charge write-downs to reduce the
carrying value of obsolete, slow moving, and non-usable inventory to net realizable value to cost
of revenue.
Share-Based Compensation Costs
We account for employee share-based compensation costs in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS 123R) and apply the
provisions of Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). We utilize the
Black-Scholes option pricing model to estimate the grant date fair value of employee share-based
compensatory awards, which requires the input of highly subjective assumptions, including expected
volatility and expected life. Historical and implied volatilities were used in estimating the fair
value of our share-based awards, while the expected life for our options was estimated to be five
years based on historical trends since our initial public offering. Further, as required under
SFAS 123R, we now estimate forfeitures for share-based awards that are not expected to vest.
Changes in these inputs and assumptions can materially affect the measure of estimated fair value
of our share-based compensation. We charge the estimated fair value to earnings on a straight-line
basis over the vesting period of the underlying awards, which is generally four years for our stock
option and deferred stock unit awards and up to two years for our employee stock purchase plan.
The Black-Scholes option pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. As our stock option
and employee stock purchase plan awards have characteristics that differ significantly from traded
options and as changes in the subjective assumptions can materially affect the estimated value, our
estimate of fair value may not accurately represent the value assigned by a third party in an
arms-length transaction. There currently is no market-based mechanism to verify the reliability
and accuracy of the estimates derived from the Black-Scholes option pricing model or other
allowable valuation models, nor is there a means to compare and adjust the estimates to actual
values. While our estimate of fair value and the associated charge to earnings materially affects
our results of operations, it has no impact on our cash position.
The guidance in SFAS 123R and SAB 107 is relatively new and the application of these
principles may be subject to further interpretation and guidance. There are significant variations
among allowable valuation models, and there is a possibility that we may adopt a different
valuation model or refine the inputs and assumptions under our current valuation model in the
future resulting in a lack of consistency in future periods. Our current or future valuation model
and the inputs and assumptions we make may also lack comparability to other companies that use
different models, inputs, or assumptions, and the resulting differences in comparability could be
material.
Income Taxes
We recognize federal, foreign, and state current tax liabilities or assets based on our
estimate of taxes payable or refundable in the then current fiscal year for each tax jurisdiction.
We also recognize federal, foreign, and state deferred tax liabilities or assets for our estimate
of future tax effects attributable to temporary differences and carryforwards and record a
valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based
on available evidence and our judgment, are not expected to be realized. If our assumptions, and
consequently our estimates, change in the future, the valuation allowance we have established for
our deferred tax assets may be changed, which could impact income tax expense.
We account for income tax contingencies in accordance with SFAS No. 5, Accounting for
Contingencies. The calculation of tax liabilities involves significant judgment in estimating the
impact of uncertainties in the application of highly complex tax laws. Resolution of these
uncertainties in a manner inconsistent with our expectations could have a material impact on our
results of operations and financial condition. We believe we have adequately provided for
reasonably foreseeable outcomes in connection with the resolution of income tax contingencies.
However, our results have in the past, and could in the future, include favorable and unfavorable
adjustments to our estimated tax liabilities in the period a determination of such estimated tax
liability is made or resolved, upon the filing of an amended return, upon a change in facts,
circumstances or interpretation, or upon the expiration of a statute of limitation. Accordingly,
our effective tax rate could fluctuate materially from period to period.
In accordance with SFAS 123R, we recognize tax benefit upon expensing certain share-based
awards associated with our share-based compensation plans, including nonqualified stock options and
deferred stock unit awards, but under current accounting standards we cannot recognize tax benefit
concurrent with the recognition of share-based compensation expenses associated with incentive
stock options and employee stock purchase plan shares
19
(qualified stock options). For qualified stock options that vested after our adoption of SFAS
123R, we recognize tax benefit only in the period when disqualifying dispositions of the underlying
stock occur, which historically has been up to several years after vesting and in a period when our
stock price substantially increases. For qualified stock options that vested prior to our adoption
of SFAS 123R, the tax benefit is recorded directly to additional paid-in capital. Accordingly,
because we cannot recognize the tax benefit for share-based compensation expense associated with
qualified stock options until the occurrence of future disqualifying dispositions of the underlying
stock and such disqualified dispositions may happen in periods when our stock price substantially
increases, and because a portion of that tax benefit may be directly recorded to additional paid-in
capital, our future quarterly and annual effective tax rates will be subject to greater volatility
and, consequently, our ability to estimate reasonably our future quarterly and annual effective tax
rates is greatly diminished.
Results of Operations
Three months ended March 31, 2007 compared with the three months ended March 31, 2006
Net Revenue.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
PC applications |
|
$ |
53,446 |
|
|
$ |
36,227 |
|
|
$ |
17,219 |
|
|
|
47.5 |
% |
% of net revenue |
|
|
83.1 |
% |
|
|
89.7 |
% |
|
|
|
|
|
|
|
|
Digital lifestyle product applications |
|
|
10,863 |
|
|
|
4,138 |
|
|
|
6,725 |
|
|
|
162.5 |
% |
% of net revenue |
|
|
16.9 |
% |
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
64,309 |
|
|
$ |
40,365 |
|
|
$ |
23,944 |
|
|
|
59.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We identify the vertical markets that our products serve as the personal computing market
(PC), from which we generated $53.4 million, or 83.1%, of net revenue during the quarter ended
March 31, 2007, and the digital lifestyle product markets, from which we generated $10.9 million,
or 16.9%, of net revenue during the quarter ended March 31, 2007. Net revenue was $64.3 million
for the three months ended March 31, 2007 compared with $40.4 million for the three months ended
March 31, 2006, an increase of $23.9 million, or 59.3%. The increase in net revenue for the three
months ended March 31, 2007 was attributable to a $17.2 million, or 47.5%, increase in PC
applications net revenue and a $6.7 million, or 162.5%, increase in digital lifestyle product
applications net revenue. Our revenue growth was primarily attributable to an approximately 95%
increase in unit shipments reflecting the combination of industry growth and market share gains,
partially offset by a lower-priced product mix and general competitive pricing pressure.
Gross Margin.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2007 |
|
2006 |
|
$ Change |
|
% Change |
Gross Margin |
|
$ |
25,147 |
|
|
$ |
18,108 |
|
|
$ |
7,039 |
|
|
|
38.9 |
% |
% of net revenue |
|
|
39.1 |
% |
|
|
44.9 |
% |
|
|
|
|
|
|
|
|
Gross Margin. Gross margin as a percentage of net revenue was 39.1%, or $25.1 million,
for the three months ended March 31, 2007 compared with 44.9%, or $18.1 million, for the three
months ended March 31, 2006. As each product we sell utilizes our capacitive sensing technology in
a design that is generally unique or specific to a customers 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. The
decline in gross margin as a percentage of net revenue primarily reflected a lower margin product
design mix, which included a substantial increase in multimedia-oriented products and general
competitive pricing pressure, partially offset by lower manufacturing costs resulting from our
continuing design, process-improvement, and cost-reduction programs.
20
Operating Expenses.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Research and development expenses |
|
$ |
9,485 |
|
|
$ |
9,106 |
|
|
$ |
379 |
|
|
|
4.2 |
% |
% of net revenue |
|
|
14.8 |
% |
|
|
22.6 |
% |
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses |
|
|
9,339 |
|
|
|
6,952 |
|
|
|
2,387 |
|
|
|
34.3 |
% |
% of net revenue |
|
|
14.5 |
% |
|
|
17.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
$ |
18,824 |
|
|
$ |
16,058 |
|
|
$ |
2,766 |
|
|
|
17.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
29.3 |
% |
|
|
39.8 |
% |
|
|
|
|
|
|
|
|
Research and Development Expenses. Research and development expenses decreased as a
percentage of net revenue to 14.7% from 22.6%, while the cost of research and development
activities increased $379,000, or 4.2%, to $9.5 million for the three months ended March 31, 2007
compared with $9.1 million for the three months ended March 31, 2006. The increase in research and
development expenses primarily reflected a $661,000 increase in employee compensation costs
resulting from additional staffing, increased base compensation related to our annual performance
review process, employee benefits costs, variable compensation costs, and recruiting costs, and a
$295,000 increase in various general support costs, partially offset by a $577,000 reduction of
development project expenses including materials and other related costs. Non-cash share-based
compensation costs included in research and development expenses were $1.3 million, or 2.0% of net
revenue, and $1.2 million, or 2.9% of net revenue, for the three months ended March 31, 2007 and
2006, respectively.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
decreased as a percentage of net revenue to 14.5% from 17.2%, while the cost of selling, general,
and administrative activities increased $2.4 million, or 34.3%, to approximately $9.3 million for
the three months ended March 31, 2007 compared with approximately $7.0 million for the three months
ended March 31, 2006. The increase in selling, general, and administrative expenses primarily
reflected a $1.1 million increase in employee compensation costs resulting from additional
staffing, increased base compensation related to our annual performance review process, employee
benefits costs, variable compensation costs, and recruiting costs, and a $541,000 increase in legal
fees, a $398,000 increase in outside consulting and outside service costs, and a $165,000 increase
in travel and related costs. The increase in legal fees is primarily related to ongoing patent
infringement litigation, which is more fully described in Part II Other Information Item 1
Legal Proceedings. Non-cash share-based compensation costs included in selling, general, and
administrative expenses were $2.0 million in both the March quarters of fiscal 2007 and 2006,
representing 3.1% and 4.9% of net revenue, respectively.
Income from Operations.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2007 |
|
2006 |
|
$ Change |
|
% Change |
Income from operations |
|
$ |
6,323 |
|
|
$ |
2,050 |
|
|
$ |
4,273 |
|
|
|
208.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
9.8 |
% |
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
We generated operating income of $6.3 million, or 9.8% of net revenue, for the three
months ended March 31, 2007 compared with approximately $2.0 million, or 5.1% of net revenue, for
the three months ended March 31, 2006. The increase in operating income primarily reflected the
impact of the increase in operating leverage resulting from the 59.3% increase in net revenue,
partially offset by a lower gross margin percentage and higher operating expenses.
21
Interest Income/(Expense).
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
2,713 |
|
|
$ |
2,179 |
|
|
$ |
534 |
|
|
|
24.5 |
% |
% of net revenue |
|
|
4.2 |
% |
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(488 |
) |
|
|
(485 |
) |
|
|
(3 |
) |
|
|
0.6 |
% |
% of net revenue |
|
|
-0.8 |
% |
|
|
-1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
2,225 |
|
|
$ |
1,694 |
|
|
$ |
531 |
|
|
|
31.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
3.5 |
% |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
Interest Income. Interest income was $2.7 million for the three months ended March 31,
2007 compared with $2.2 million for the three months ended March 31, 2006. The $534,000 increase
in interest income resulted from a combination of higher average interest rates and higher average
invested cash balances. The increase in average invested cash balances during the past 12 months
was primarily attributable to $44.5 million of net cash flows from operations, option exercises,
including excess tax benefit thereon, partially offset by $32.3 million of treasury stock purchases
under our common stock repurchase program.
Interest Expense. Interest expense was $488,000 for the three months ended March 31, 2007,
essentially unchanged compared with interest expense of $485,000 for the three months ended March
31, 2006. Interest expense primarily reflected the combination of interest expense and
amortization of debt issuance costs related to our convertible senior subordinated notes issued in
December 2004. The annual debt service cost on the notes is approximately $938,000, which excludes
$860,000 of amortization of debt issuance costs.
Provision for Income Taxes.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2007 |
|
2006 |
|
$ Change |
|
% Change |
Income before provision for income taxes |
|
$ |
8,548 |
|
|
$ |
3,744 |
|
|
$ |
4,804 |
|
|
|
128.3 |
% |
Provision for income taxes |
|
|
2,913 |
|
|
|
2,121 |
|
|
|
792 |
|
|
|
37.3 |
% |
% of income before provision for income taxes |
|
|
34.1 |
% |
|
|
56.7 |
% |
|
|
|
|
|
|
|
|
The provision for income taxes for the three months ended March 31, 2007 was $2.9 million
compared with $2.1 million for the three months ended March 31, 2006, reflecting higher pre-tax
profit levels, partially offset by a lower effective tax rate. The income tax provision
represented estimated federal, foreign, and state taxes for the three months ended March 31, 2007
and 2006. The effective tax rate for the three months ended March 31, 2007 was 34.1% and diverged
from the combined federal and state statutory rate primarily due to the benefit of research tax
credits and the impact of tax-exempt interest income, partially offset by the impact of accounting
for share-based compensation and foreign withholding taxes. The effective tax rate for the three
months ended March 31, 2006 was 56.7% and diverged from the combined federal and state statutory
rate primarily as a result of the impact of accounting for share-based compensation and other
permanent taxable differences, partially offset by the impact of higher income from foreign
operations, the benefit of tax-exempt interest income, and research tax credits.
22
Nine months ended March 31, 2007 compared with the nine months ended March 31, 2006
Net Revenue.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
PC applications |
|
$ |
162,722 |
|
|
$ |
117,890 |
|
|
$ |
44,832 |
|
|
|
38.0 |
% |
% of net revenue |
|
|
83.4 |
% |
|
|
83.8 |
% |
|
|
|
|
|
|
|
|
Digital lifestyle product applications |
|
|
32,489 |
|
|
|
22,755 |
|
|
|
9,734 |
|
|
|
42.8 |
% |
% of net revenue |
|
|
16.6 |
% |
|
|
16.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
195,211 |
|
|
$ |
140,645 |
|
|
$ |
54,566 |
|
|
|
38.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We generated $162.7 million, or 83.4%, of net revenue during the nine months ended March
31, 2007 from the personal computing market (PC), and we generated $32.5 million, or 16.6%, of
net revenue during the nine months ended March 31, 2007 from the digital lifestyle product markets.
Net revenue was $195.2 million for the nine months ended March 31, 2007 compared with $140.6
million for the nine months ended March 31, 2006, an increase of $54.6 million, or 38.8%. The
increase in net revenue for the nine months ended March 31, 2007 was attributable to a $44.8
million, or 38.0%, increase in PC applications net revenue and a $9.7 million, or 42.8%, increase
in digital lifestyle product applications net revenue. Our revenue growth was primarily
attributable to an approximately 72% increase in unit shipments reflecting the combination of
industry growth and market share gains, partially offset by a lower-priced product mix and general
competitive pricing pressure.
Gross Margin.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
2007 |
|
2006 |
|
$ Change |
|
% Change |
Gross Margin |
|
$ |
77,933 |
|
|
$ |
63,951 |
|
|
$ |
13,982 |
|
|
|
21.9 |
% |
% of net revenue |
|
|
39.9 |
% |
|
|
45.5 |
% |
|
|
|
|
|
|
|
|
Gross Margin. Gross margin as a percentage of net revenue was 39.9%, or $77.9 million,
for the nine months ended March 31, 2007 compared with 45.5%, or $64.0 million, for the nine months
ended March 31, 2006. As each product we sell utilizes our capacitive sensing technology in a
design that is generally unique or specific to a customers 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. The decline in gross
margin as a percentage of net revenue primarily reflected a lower margin product design mix, which
included a substantial increase in multimedia-oriented products and general competitive pricing
pressure, partially offset by lower manufacturing costs resulting from our continuing design,
process-improvement, and cost-reduction programs.
Operating Expenses.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Research and development expenses |
|
$ |
28,631 |
|
|
$ |
25,740 |
|
|
$ |
2,891 |
|
|
|
11.2 |
% |
% of net revenue |
|
|
14.7 |
% |
|
|
18.3 |
% |
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses |
|
|
26,067 |
|
|
|
20,593 |
|
|
|
5,474 |
|
|
|
26.6 |
% |
% of net revenue |
|
|
13.4 |
% |
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
Restructuring charge |
|
|
915 |
|
|
|
|
|
|
|
915 |
|
|
|
|
|
% of net revenue |
|
|
0.5 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
$ |
55,613 |
|
|
$ |
46,333 |
|
|
$ |
9,280 |
|
|
|
20.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
28.5 |
% |
|
|
32.9 |
% |
|
|
|
|
|
|
|
|
Research and Development Expenses. Research and development expenses decreased as a
percentage of net revenue to 14.7% from 18.3%, while the cost of research and development
activities increased $2.9 million, or 11.2%,
23
to $28.6 million for the nine months ended March 31,
2007 compared with $25.7 million for the nine months ended March 31, 2006. The increase in
research and development expenses primarily reflected a $1.9 million increase in employee
compensation costs resulting from additional staffing, increased base compensation related to our
annual performance review process, employee benefits costs, variable compensation costs, and
recruiting costs, a $786,000 increase in consulting and outside service costs, and a $952,000
increase in infrastructure and support costs, partially offset by a $790,000 reduction of project
materials and related costs. Non-cash share-based compensation costs included in research and
development expenses were $3.7 million, or 1.9% of net revenue, and $3.7 million, or 2.6% of net
revenue, for the nine months ended March 31, 2007 and 2006, respectively.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
decreased as a percentage of net revenue to 13.4% from 14.6%, while the cost of selling, general,
and administrative activities increased $5.5 million, or 26.6%, to $26.1 million for the nine
months ended March 31, 2007 compared with $20.6 million for the nine months ended March 31, 2006.
The increase in selling, general, and administrative expenses primarily reflected a $3.1 million
increase in employee compensation and employment related costs resulting from additional staffing,
increased base compensation related to our annual performance review process, employee benefits
costs, recruiting costs, and variable compensation costs, a $1.5 million increase in legal fees,
and a $729,000 increase in consulting and outside service costs. The increase in legal fees is
primarily related to ongoing patent infringement litigation, which is more fully described in Part
II Other Information Item 1 Legal Proceedings. Non-cash share-based compensation costs
included in selling, general, and administrative expenses were $6.2 million, or 3.2% of net
revenue, and $5.8 million, or 4.1% of net revenue, for the nine months ended March 31, 2007 and
2006, respectively.
Restructuring Charge. During the nine-month period ended March 31, 2007, we incurred a
restructuring charge of $915,000 in connection with the closure of our United Kingdom office as
part of our strategic efforts to realign our development capabilities to meet the needs of our Asia
Pacific customer base. Included in the restructuring charge were personnel costs consisting of
severance and relocation of $526,000, a lease reserve of $287,000, net of estimated sublease
income, and a non-cash impairment of property and equipment of $102,000.
Income from Operations.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
2007 |
|
2006 |
|
$ Change |
|
% Change |
Income from operations |
|
$ |
22,320 |
|
|
$ |
17,618 |
|
|
$ |
4,702 |
|
|
|
26.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
11.4 |
% |
|
|
12.5 |
% |
|
|
|
|
|
|
|
|
We generated operating income of $22.3 million, or 11.4% of net revenue, for the nine
months ended March 31, 2007 compared with $17.6 million, or 12.5% of net revenue, for the nine
months ended March 31, 2006. The increase in operating income primarily reflected the impact of
the increase in operating leverage resulting from the 38.8% increase in net revenue, partially
offset by a lower gross margin percentage and higher operating expenses.
Interest Income/(Expense).
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
8,230 |
|
|
$ |
5,631 |
|
|
$ |
2,599 |
|
|
|
46.2 |
% |
% of net revenue |
|
|
4.2 |
% |
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1,463 |
) |
|
|
(1,454 |
) |
|
|
(9 |
) |
|
|
0.6 |
% |
% of net revenue |
|
|
-0.7 |
% |
|
|
-1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
6,767 |
|
|
$ |
4,177 |
|
|
$ |
2,590 |
|
|
|
62.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
3.5 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
Interest Income. Interest income was $8.2 million for the nine months ended March 31,
2007 compared with $5.6 million for the nine months ended March 31, 2006. The $2.6 million
increase in interest income resulted from a combination of higher average interest rates and higher
average invested cash balances. The increase in average invested cash balances during the past 12
months was primarily attributable to $44.5 million of net cash flows from
24
operations and option
activity, including excess tax benefit thereon, partially offset by $32.3 million of treasury stock
purchases under our common stock repurchase program.
Interest Expense. Interest expense was approximately $1.5 million for the nine months ended
March 31, 2007 and 2006. Interest expense primarily reflected the combination of interest expense
and amortization of debt issuance costs related to our convertible senior subordinated notes issued
in December 2004. The annual debt service cost on the notes is approximately $938,000, which
excludes $860,000 of amortization of debt issuance costs.
Provision for Income Taxes.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
2007 |
|
2006 |
|
$ Change |
|
% Change |
Income before provision for income taxes |
|
$ |
29,087 |
|
|
$ |
21,795 |
|
|
$ |
7,292 |
|
|
|
33.5 |
% |
Provision for income taxes |
|
|
9,984 |
|
|
|
9,857 |
|
|
|
127 |
|
|
|
1.3 |
% |
% of income before provision for income taxes |
|
|
34.3 |
% |
|
|
45.2 |
% |
|
|
|
|
|
|
|
|
The provision for income taxes for the nine months ended March 31, 2007 was $10.0 million
compared with $9.9 million for the nine months ended March 31, 2006, reflecting higher pre-tax
profit levels, largely offset by a lower effective tax rate. The income tax provision represented
estimated federal, foreign, and state taxes for the nine months ended March 31, 2007 and 2006. The
effective tax rate for the nine months ended March 31, 2007 was 34.3% and diverged from the
combined federal and state statutory rate primarily due to the benefit of research tax credits in
general, research tax credits generated from the retroactive extension of the federal research
credit signed into law in December 2006, the net release of contingency reserves, and the impact of
tax-exempt interest income, partially offset by the impact of accounting for share-based
compensation and foreign withholding taxes. The effective tax rate for the nine months ended March
31, 2006 was 45.2% and diverged from the combined federal and state statutory rate primarily as a
result of the impact of accounting for share-based compensation and other permanent taxable
differences, partially offset by the impact of higher income from foreign operations, the benefit
of tax-exempt interest income, and research tax credits.
In accordance with SFAS 123R, we recognize tax benefit upon expensing certain share-based
awards associated with our share-based compensation plans, including nonqualified stock options and
deferred stock unit awards, but under current accounting standards we cannot recognize tax benefit
concurrent with the recognition of share-based compensation expenses associated with incentive
stock options and employee stock purchase plan shares (qualified stock options). For qualified
stock options that vested after our adoption of SFAS 123R, we recognize tax benefit only in the
period when disqualifying dispositions of the underlying stock occur, which historically has been
up to several years after vesting and in a period when our stock price substantially increases.
For qualified stock options that vested prior to our adoption of SFAS 123R, the tax benefit is
recorded directly to additional paid-in capital. Tax benefit associated with total share-based
compensation was approximately $2.8 million and $2.2 million for the nine months ended March 31,
2007 and 2006, respectively. Excluding the impact of share-based compensation and the related tax
benefit, the effective tax rate for the nine months ended March 31, 2007 and 2006 would have been
32.3% and 37.9%, respectively. Because we cannot recognize the tax benefit for share-based
compensation expense associated with qualified stock options until the occurrence of future
disqualifying dispositions of the underlying stock and such disqualified dispositions may happen in
periods when our stock price substantially increases, and because a portion of that tax benefit may
be recorded directly to additional paid-in capital, our future quarterly and annual effective tax
rates will be subject to greater volatility and, consequently, our ability to reasonably estimate
our future quarterly and annual effective tax rates is greatly diminished.
Liquidity and Capital Resources
Our cash, cash equivalents, and short-term investments of $245.2 million as of March 31, 2007
were essentially unchanged from June 30, 2006. During the nine months ended March 31, 2007, cash,
cash equivalents, and short-term investments included the impact of $14.7 million from operating
cash flows, $14.0 million from stock option exercises and our employee stock purchase plan
activity, and $7.2 million of excess tax benefit from share-based compensation, offset by $32.3
million of cash used for the repurchase of approximately 1.3 million shares of our common stock and
$4.0 million used for the purchase of property and equipment.
25
Cash Flows from Operating Activities. Operating activities during the nine months ended March
31, 2007 generated cash of approximately $14.7 million compared with approximately $19.5 million of
cash generated during the nine months ended March 31, 2006. For the nine months ended March 31,
2007, net cash provided by operating activities was primarily attributable to net income of $19.1
million plus adjustments for non-cash charges, including share-based compensation costs,
depreciation, amortization of debt issuance costs, and the impairment of fixed assets aggregating
$12.8 million, partially offset by a $16.7 million net increase in operating assets and
liabilities. The increase in operating assets and liabilities was primarily attributable to a
$15.1 million increase in accounts receivable, reflecting the substantial increase in our net
revenue during the period. For the nine months ended March 31, 2006, the net cash provided by
operating activities was primarily attributable to net income of $11.9 million plus adjustments for
non-cash charges, including share-based compensation costs, depreciation, and amortization of debt
issuance costs totaling $11.8 million, partially offset by a net increase in operating assets and
liabilities of $3.1 million and deferred tax, net of realized and excess tax benefit generated from
share-based compensation, totaling $1.2 million.
Cash Flows from Investing Activities. Our investing activities typically relate to purchases
of government-backed securities and investment-grade fixed income instruments and purchases of
property and equipment. Investing activities during the nine months ended March 31, 2007 generated net cash of $5.1 million
compared with net cash used of $26.1 million during the nine months ended March 31, 2006. During
the nine months ended March 31, 2007, net cash generated by investing activities consisted of
$206.3 million in proceeds from sales and maturities of short-term investments, largely offset by
$197.3 million used for the purchase of short-term investments and approximately $4.0 million used
for the purchase of property and equipment. During the nine months ended March 31, 2006, net cash
used in investing activities consisted of $188.1 million for purchases of short-term investments
and $2.4 million for purchases of property and equipment, partially offset by $164.3 million in
proceeds from sales and maturities of short-term investments.
Cash Flows from Financing Activities. Net cash used by financing activities for the nine
months ended March 31, 2007 was approximately $11.1 million compared with net cash used in
financing activities of $8.3 million for the nine months ended March 31, 2006. Cash used in our
financing activities for the nine months ended March 31, 2007 consisted primarily of $32.3 million
of cash used for the purchase of 1.3 million shares of treasury stock, partially offset by
approximately $14.1 million in proceeds from common stock issued under our stock option plans and
employee stock purchase plan and approximately $7.2 million of excess tax benefit from share-based
compensation. Our financing activities for the nine months ended March 31, 2006 consisted
primarily of $18.8 million of cash used for the purchase of 1.2 million shares of treasury stock,
partially offset by approximately $6.6 million in proceeds from common stock issued under our stock
option plans and employee stock purchase plan and $4.0 million of excess tax benefit from
share-based compensation.
Common Stock Repurchase Program. In October 2005, our board of directors authorized an
additional $40 million for our stock repurchase program, raising the aggregate authorization level
to $80 million. The program authorizes us to repurchase our common stock on 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 repurchased under this program is held as treasury stock. Aggregate purchases under
this program totaled 3,588,100 shares through March 31, 2007 at a cost of $72.3 million, or an
average cost of $20.16 per share. Subsequent to March 31, 2007, our board of directors authorized
an additional $80 million for our stock repurchase program, bringing the total authorization level
to $160 million and extending the period for repurchase to April 2009.
Convertible Senior Subordinated Notes. During December 2004, we issued $125 million of 0.75%
Convertible Senior Subordinated Notes maturing on December 1, 2024 (the Notes) in a private
offering pursuant to Rule 144A under the Securities Act of 1933, as amended. The Notes bear
interest at a rate of 0.75% per annum payable on December 1 and June 1 of each year. We will pay
additional contingent interest on the Notes if the average trading price of the Notes is at or
above 120% of the principal amount of the Notes for a specified period beginning with the six-month
period commencing December 1, 2009. The amount of contingent interest payable on the Notes with
respect to a six-month period, for which contingent interest applies, will equal 0.375% per annum
of the average trading price of the Notes for a specified five trading-day period preceding such
six-month period.
The Notes are convertible into 2,473,975 shares of our common stock, subject to adjustment in
certain events. The denominator of the diluted net income per share calculation includes the
weighted average effect of the 2,473,975 shares of common stock issuable upon conversion of the
Notes in accordance with SFAS 128 as it applies to the method of settling the principal amount of
the notes and Emerging Issues Task Force (EITF) Issue No. 04-08 as it
26
applies to the market price
conversion trigger embedded in the notes. Through November 30, 2009, upon the occurrence of a
fundamental change as defined in the indenture governing the Notes, we could potentially be
obligated to issue up to 989,587 additional shares, or a total of 3,463,562 shares of common stock.
These additional shares, contingently issuable upon a fundamental change, are not included in the
calculation of diluted net income per share.
The Notes may be converted (1) if, during any calendar quarter commencing after December 31,
2004, the last reported sale price of our common stock for at least 20 trading days in the period
of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is
greater than or equal to 120% of the applicable conversion price on such last trading day; (2) on
or after January 1, 2020; (3) if we have called the Notes for redemption; or (4) during prescribed
periods, upon the occurrence of specified corporate transactions or fundamental changes. On or
after December 1, 2009, we may redeem for cash all or a portion of the notes at a redemption price
of 100% of the principal amount of the notes plus accrued and unpaid interest, including contingent
interest and additional interest, if any. Noteholders have the right to require us to repurchase
all or a portion of their notes for cash on December 1, 2009, December 1, 2014, and December 1,
2019 at a price equal to 100% of the principal amount of the Notes to be purchased plus accrued and
unpaid interest, including contingent interest and additional interest, if any.
In April 2007, we made an irrevocable election to cash settle the principal amount of our
convertible notes upon conversion of the notes. Our election to cash settle the principal amount
of our convertible notes upon conversion will result in us using the treasury stock method for
calculating diluted shares. Accordingly, we will include on a prospective basis diluted shares
underlying the convertible notes in our diluted earnings per share calculation only when the
average closing stock price for the period exceeds the conversion price of the notes, which is
currently $50.53 per share. As of March 31, 2007, none of the conditions for conversion or
redemption of the Notes had occurred.
The Notes are unsecured senior subordinated obligations and rank junior in right of payment to
all of our existing and future senior indebtedness, equal in right of payment with all of our
existing and future indebtedness or other obligations that are not, by their terms, either senior
or subordinated to the Notes, including trade debt and other general unsecured obligations that do
not constitute senior or subordinated indebtedness, and senior in right of payment to all of our
future indebtedness that, by its terms, is subordinated to the Notes. There are no financial
covenants in the Notes.
Note Payable to a Related Party. The note payable of $1.5 million to National Semiconductor
Corporation (National) due August 2007 represents limited-recourse debt that is secured solely by a
portion of our stockholdings in Foveon, Inc., or Foveon, in which National is also an investor.
Our decision to make any payment under the limited-recourse note to National will depend on several
factors, including current valuations, Foveons progress and prospects, and any discounts
associated with the note.
$100 Million Shelf Registration. We have registered an aggregate of $100 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.
$125 Million Shelf Registration. We have registered an aggregate of $125 million of our 0.75%
Convertible Senior Subordinated Notes due 2024 and the common stock issuable upon conversion of the
notes. The shares issued upon conversion generally will be freely tradeable after their issuance
unless held by an affiliate, 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, cash equivalents, and
short-term investment balances and anticipated cash flows from operating activities will be
sufficient to meet our working capital and other cash requirements over the course of at least the
next 12 months. Our future capital requirements will depend on many factors, including our
business levels, 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 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 unexpected business opportunities
or to respond to competitive pressures could be limited or severely constrained.
27
Contractual Obligations and Commercial Commitments
The following table sets forth a summary of our material contractual obligations and
commercial commitments as of March 31, 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Convertible senior subordinated notes (1) (2) |
|
$ |
142 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
137 |
|
Note payable (1) |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Building leases |
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
147 |
|
|
$ |
5 |
|
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents both principal and interest payable through the maturity date of the underlying
contractual obligation. |
|
(2) |
|
Our convertible senior subordinated notes include a provision allowing the noteholders to
require us, at the noteholders discretion, to repurchase their notes at a redemption price of
100% of the principal amount of the notes plus accrued and unpaid interest (including
contingent interest and additional interest, if any) on December 1, 2009, December 1, 2014,
and December 1, 2019 and in the event of a fundamental change as described in the indenture
governing the notes. The early repayment of the notes is not reflected in the above schedule,
but if all the noteholders elected to exercise their rights to require us to repurchase their
notes on December 1, 2009, then our contractual obligations for the one-to-three year period
would be increased by $125 million and no amounts would be due in more than three years. |
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, (FIN
48) that clarifies the accounting for uncertainty in income taxes recognized in an entitys
financial statements in accordance with SFAS No. 109. FIN 48 is designed to reduce the disparity
in accounting treatment for uncertain tax positions resulting from diverse interpretations of SFAS
109 among companies. FIN 48 prescribes a recognition threshold and measurement attribute for
financial statement disclosure of tax positions taken or expected to be taken on a tax return. FIN
48 is effective beginning in our first quarter of fiscal 2008. We expect the adoption of FIN 48
will result in certain presentation reclassifications on our balance sheet, but we do not expect a
material impact on our results of operations or cash flows.
In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin
No. 108, (SAB 108), which provides interpretive guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a current year
misstatement. SAB 108 provides transition guidance for correcting errors and requires registrants
to quantify misstatements using both the balance-sheet and income-statement approaches and to
evaluate whether either approach results in quantifying an error that is material in light of
relevant quantitative and qualitative factors. In the year of adoption only, if the effect is
determined to be material, SAB 108 allows registrants to record the effect as a cumulative-effect
adjustment to beginning-of-year retained earnings. SAB 108 does not change the requirements within
SFAS No. 154, Accounting Changes and Error Correctionsa replacement of APB No. 20 and FASB
Statement No. 3, for the correction of an error on financial statements. Further, SAB 108 does
not change the Staffs previous guidance in SAB 99 on evaluating the materiality of misstatements.
SAB 108 is effective for our fiscal 2007. We do not expect the adoption of SAB 108 to have a
material impact on our financial position, results of operations, or cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value under U.S. generally
accepted accounting principles, and expands disclosure about fair value measurements. SFAS 157
applies under other accounting standards that require or permit fair value measurements.
Accordingly, SFAS 157 does not require any new fair value measurement. SFAS 157 is effective
beginning in our first quarter of fiscal 2009. We do not expect the adoption of SFAS 157 to have a
material impact on our financial position, results of operations, or cash flows.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk has not changed significantly from the interest rate and foreign currency
risks disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended June 30,
2006.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, our Chief Executive Officer and Chief
Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and
procedures, which included inquiries made to certain other of our employees. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that our
disclosure controls and procedures are designed to ensure that information required to be disclosed
is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure and are effective and
sufficient to ensure that we record, process, summarize, and report information required to be
disclosed by us in our periodic reports filed under the Securities Exchange Act within the time
periods specified by the Securities and Exchange Commissions rules and forms.
During the fiscal quarter covered by this report, we implemented a new ERP system and in
connection therewith adapted certain of our internal controls over financial reporting to utilize
our ERP system capabilities. We believe there have not been any changes in our internal control
over financial reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
29
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 10, 2006, Elantech Devices Corporation filed a Complaint for Patent Infringement
against us in the United States District Court for the Northern District of California, San Jose
Division, claiming that we infringed Elantechs U.S. Patent No. 5,825,352 and seeking single and
treble damages, attorneys fees, and a permanent injunction against us infringing or inducing
others to infringe the patent. On April 6, 2006, we filed our Answer to the Complaint and
Counterclaims against Elantech, claiming that Elantech has infringed and induced infringement of
our U.S. Patent Nos. 5,543,591, 5,880,411, 5,943,052, and 6,380,931 and seeking single and treble
damages, attorneys fees, and a permanent injunction against infringing or inducing others to
infringe.
Elantech responded to our counterclaim denying liability and counterclaimed seeking an
injunction and damages for alleged violations of California law. We subsequently filed a motion to
dismiss the Elantech counterclaims that was granted on July 7, 2006 with leave to amend the
counterclaims after the adjudication of the patent infringement claims. We intend to vigorously
defend our patents and pursue our counterclaims.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
In April 2007, our board of directors authorized a further expansion of our stock repurchase
program for up to an additional $80 million, raising the aggregate authorization level to $160
million and extending the period for repurchase to April 2009. The following sets forth purchases
of our common stock under the repurchase program for each fiscal month during the three month
period ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Maximum |
|
|
|
|
|
|
|
|
|
|
Number of |
|
Dollar Value |
|
|
|
|
|
|
|
|
|
|
Shares |
|
of Shares |
|
|
|
|
|
|
Average |
|
Purchased |
|
that May |
|
|
Total |
|
Price |
|
as Part of |
|
Yet Be |
|
|
Number |
|
Paid |
|
Publicly |
|
Purchased |
|
|
of Shares |
|
per |
|
Announced |
|
Under the |
Period |
|
Purchased |
|
Share |
|
Program |
|
Program |
December 31, 2006 - February 3, 2007 |
|
|
|
|
|
|
|
|
|
|
2,521,100 |
|
|
$ |
35,388,000 |
|
February 4, 2007 - March 3, 2007 |
|
|
1,067,000 |
|
|
$ |
25.99 |
|
|
|
3,588,100 |
|
|
$ |
7,653,000 |
|
March 4, 2007 - March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
3,588,100 |
|
|
$ |
7,653,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,067,000 |
|
|
$ |
25.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 6. EXHIBITS
|
|
|
|
|
|
|
|
|
|
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 |
30
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: May 7, 2007
|
|
By:
|
|
/s/ Francis F. Lee |
|
|
|
|
|
|
|
Name:
|
|
Francis F. Lee |
|
|
Title:
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
By:
|
|
/s/ Russell J. Knittel |
|
|
|
|
|
|
|
Name:
|
|
Russell J. Knittel |
|
|
Title:
|
|
Senior Vice President, Chief Financial Officer, and Chief
Administrative Officer |
31
INDEX TO EXHIBIT
|
|
|
|
|
|
|
|
|
|
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 |
32
exv31w1
EXHIBIT 31.1
Certification of Chief Executive Officer
I, Francis F. Lee, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Synaptics Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
Date: May 7, 2007
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/s/ Francis F. Lee
Francis F. Lee
Chief Executive Officer
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exv31w2
EXHIBIT 31.2
Certification of Chief Financial Officer
I, Russell J. Knittel, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Synaptics Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
Date: May 7, 2007
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/s/ Russell J. Knittel
Russell J. Knittel
Chief Financial Officer
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exv32w1
EXHIBIT 32.1
Section 1350 Certification of Chief Executive Officer
In connection with the Quarterly Report on Form 10-Q of Synaptics Incorporated (the Company)
for the quarterly period ended March 31, 2007 as filed with the Securities and Exchange Commission
on the date hereof (the Report), I, Francis F. Lee, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and |
(2) |
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The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
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/s/ Francis F. Lee
Francis F. Lee
Chief Executive Officer
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May 7, 2007 |
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exv32w2
EXHIBIT 32.2
Section 1350 Certification of Chief Financial Officer
In connection with the Quarterly Report on Form 10-Q of Synaptics Incorporated (the Company)
for the quarterly period ended March 31, 2007 as filed with the Securities and Exchange Commission
on the date hereof (the Report), I, Russell J. Knittel, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that:
(1) |
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and |
(2) |
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The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
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/s/ Russell J. Knittel
Russell J. Knittel
Chief Financial Officer
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May 7, 2007 |
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