Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2011
Commission file number 000-49602
SYNAPTICS INCORPORATED
(Exact name of registrant as specified in its charter)
| Delaware | 77-0118518 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification No.) |
3120 Scott Blvd.
Santa Clara, California 95054
Santa Clara, California 95054
(Address of principal executive offices) (Zip code)
(408) 454-5100
(Registrant’s 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
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 January 27, 2012: 32,942,537
SYNAPTICS INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2011
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2011
TABLE OF CONTENTS
Table of Contents
PART I — FINANCIAL INFORMATION
| ITEM 1. | CONDENSED FINANCIAL STATEMENTS (UNAUDITED) |
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
| December 31, | June 30, | |||||||
| 2011 | 2011 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 282,465 | $ | 247,153 | ||||
Accounts receivable, net of allowances of $709
at December 31, 2011 and June 30, 2011 |
86,748 | 93,808 | ||||||
Inventories |
29,223 | 28,850 | ||||||
Prepaid expenses and other current assets |
5,159 | 4,373 | ||||||
Total current assets |
403,595 | 374,184 | ||||||
Property and equipment at cost, net of accumulated depreciation of $33,942
and $29,443 at December 31, 2011 and June 30, 2011, respectively |
25,645 | 26,222 | ||||||
Goodwill |
1,927 | 1,927 | ||||||
Non-current investments |
21,922 | 25,876 | ||||||
Other assets |
28,802 | 27,992 | ||||||
| $ | 481,891 | $ | 456,201 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 47,847 | $ | 44,930 | ||||
Accrued compensation |
12,897 | 13,210 | ||||||
Income taxes payable |
7,940 | 11,808 | ||||||
Other accrued liabilities |
24,142 | 22,813 | ||||||
Total current liabilities |
92,826 | 92,761 | ||||||
Notes payable |
2,305 | 2,305 | ||||||
Other liabilities |
22,869 | 21,142 | ||||||
Stockholders’ equity: |
||||||||
Common stock: |
||||||||
$0.001 par value; 120,000,000
shares authorized,
47,624,994 and 46,832,208 shares issued, and 32,867,195 and
33,465,732
shares outstanding, at December 31, 2011 and June 30, 2011,
respectively |
48 | 47 | ||||||
Additional paid-in capital |
435,483 | 406,653 | ||||||
Treasury stock: 14,757,799 and 13,366,476
common treasury shares at
December 31, 2011 and June 30, 2011, respectively, at cost |
(385,666 | ) | (352,142 | ) | ||||
Accumulated other comprehensive income |
713 | 2,520 | ||||||
Retained earnings |
313,313 | 282,915 | ||||||
Total stockholders’ equity |
363,891 | 339,993 | ||||||
| $ | 481,891 | $ | 456,201 | |||||
See notes to condensed consolidated financial statements (unaudited).
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SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenue |
$ | 145,470 | $ | 159,581 | $ | 278,916 | $ | 312,766 | ||||||||
Cost of revenue |
76,747 | 94,543 | 148,933 | 184,900 | ||||||||||||
Gross margin |
68,723 | 65,038 | 129,983 | 127,866 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
29,837 | 26,640 | 58,063 | 51,560 | ||||||||||||
Selling, general, and administrative |
17,721 | 18,958 | 34,430 | 34,506 | ||||||||||||
Total operating expenses |
47,558 | 45,598 | 92,493 | 86,066 | ||||||||||||
Operating income |
21,165 | 19,440 | 37,490 | 41,800 | ||||||||||||
Interest income |
251 | 226 | 451 | 437 | ||||||||||||
Interest expense |
(5 | ) | (5 | ) | (9 | ) | (9 | ) | ||||||||
Impairment (loss)/recovery on
investments, net |
(7 | ) | — | 13 | 10 | |||||||||||
Income before provision for income taxes |
21,404 | 19,661 | 37,945 | 42,238 | ||||||||||||
Provision for income taxes |
4,021 | 1,983 | 7,547 | 5,861 | ||||||||||||
Net income |
$ | 17,383 | $ | 17,678 | $ | 30,398 | $ | 36,377 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.53 | $ | 0.52 | $ | 0.93 | $ | 1.06 | ||||||||
Diluted |
$ | 0.51 | $ | 0.50 | $ | 0.89 | $ | 1.02 | ||||||||
Shares used in computing net income per
share: |
||||||||||||||||
Basic |
32,569 | 33,954 | 32,717 | 34,181 | ||||||||||||
Diluted |
34,005 | 35,360 | 33,972 | 35,644 | ||||||||||||
See notes to condensed consolidated financial statements (unaudited).
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SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Six Months Ended | ||||||||
| December 31, | ||||||||
| 2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 30,398 | $ | 36,377 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Share-based compensation costs |
16,666 | 17,357 | ||||||
Deferred taxes |
(1,335 | ) | (1,924 | ) | ||||
Depreciation of property and equipment |
5,533 | 5,295 | ||||||
Impairment of software, property, and equipment |
1,008 | — | ||||||
Impairment recovery of investments |
(13 | ) | (10 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
7,060 | (24,134 | ) | |||||
Inventories |
(373 | ) | (4,335 | ) | ||||
Prepaid expenses and other current assets |
(786 | ) | 49 | |||||
Other assets |
277 | (190 | ) | |||||
Accounts payable |
2,917 | 11,010 | ||||||
Accrued compensation |
(313 | ) | 598 | |||||
Income taxes payable |
(2,181 | ) | (1,482 | ) | ||||
Other accrued liabilities |
1,369 | 4,840 | ||||||
Net cash provided by operating activities |
60,227 | 43,451 | ||||||
Cash flows from investing activities |
||||||||
Proceeds from sales and maturities of non-current
investments |
2,160 | 250 | ||||||
Purchases of property and equipment |
(5,964 | ) | (6,944 | ) | ||||
Net cash used in investing activities |
(3,804 | ) | (6,694 | ) | ||||
Cash flows from financing activities |
||||||||
Purchases of treasury stock |
(33,524 | ) | (40,210 | ) | ||||
Proceeds from issuance of shares |
13,895 | 11,558 | ||||||
Payroll taxes for deferred stock units |
(1,482 | ) | (1,519 | ) | ||||
Net cash used in financing activities |
(21,111 | ) | (30,171 | ) | ||||
Net increase in cash and cash equivalents |
35,312 | 6,586 | ||||||
Cash and cash equivalents at beginning of period |
247,153 | 209,858 | ||||||
Cash and cash equivalents at end of period |
$ | 282,465 | $ | 216,444 | ||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid for income taxes |
$ | 11,251 | $ | 9,291 | ||||
See notes to condensed consolidated financial statements (unaudited).
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SYNAPTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, and
U.S. generally accepted accounting principles, or U.S. GAAP. However, certain information or
footnote disclosures normally included in financial statements prepared in accordance with U.S.
GAAP 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, 2011.
The consolidated financial statements include our financial statements and those of our wholly
owned subsidiaries. All significant intercompany balances and transactions have been eliminated
upon consolidation.
Our fiscal year is the 52- or 53-week period ending on the last Saturday in June. Our fiscal
2012 is a 53-week period ending on June 30, 2012. Our fiscal 2011 was a 52-week period ending on
June 25, 2011. The fiscal periods presented in this report were a 14-week period for the three
months ended December 31, 2011 and a 13-week period for the three months ended December 25, 2010.
For ease of presentation, the accompanying consolidated financial statements have been shown as
ending on 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. GAAP requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue,
expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to revenue recognition, allowance for doubtful
accounts, cost of revenue, inventories, product warranty, share-based compensation costs, provision
for income taxes, deferred income tax asset valuation allowances, uncertain tax positions, tax
contingencies, goodwill, intangible assets, investments, and contingencies. We base our estimates
on historical experience, applicable laws and regulations, and various quantitative and qualitative
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.
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, which is generally upon shipment. We accrue for estimated sales
returns and other allowances, based on historical experience, at the time we recognize revenue.
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3. Net Income Per Share
The computation of basic and diluted net income per share was as follows (in thousands, except
per share data):
| Three Months Ended | Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Net income |
$ | 17,383 | $ | 17,678 | $ | 30,398 | $ | 36,377 | ||||||||
Denominator: |
||||||||||||||||
Shares, basic |
32,569 | 33,954 | 32,717 | 34,181 | ||||||||||||
Effect of dilutive share-based awards |
1,436 | 1,406 | 1,255 | 1,463 | ||||||||||||
Shares, diluted |
34,005 | 35,360 | 33,972 | 35,644 | ||||||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.53 | $ | 0.52 | $ | 0.93 | $ | 1.06 | ||||||||
Diluted |
$ | 0.51 | $ | 0.50 | $ | 0.89 | $ | 1.02 | ||||||||
Our basic net income per share amounts for each period presented have been computed using the
weighted average number of shares of common stock outstanding. Our diluted net income per share
amounts for each period presented include the weighted average effect of potentially dilutive
shares. We use the “treasury stock” method to determine the dilutive effect of our stock options,
deferred stock units, or DSUs, and convertible notes.
Dilutive net income per share amounts do not include the weighted average effect of 4,076,726
and 3,851,002 share-based awards that were outstanding during the three months ended December 31,
2011 and 2010, and 4,076,777 and 3,916,290 share-based awards that were outstanding during the six
months ended December 31, 2011 and 2010, respectively. These share-based awards were not included
in the computation of diluted net income per share because their effect would have been
antidilutive.
4. Fair Value of Cash Equivalents and Investments
Financial assets and liabilities measured at fair value on a recurring basis, by level within
the fair value hierarchy consisted of the following (in thousands):
| December 31, | June 30, | |||||||||||||||
| 2011 | 2011 | |||||||||||||||
| Level 1 | Level 3 | Level 1 | Level 3 | |||||||||||||
Money market |
$ | 279,175 | $ | — | $ | 243,966 | $ | — | ||||||||
Auction rate securities |
— | 21,922 | — | 25,876 | ||||||||||||
Total
available-for-sale
securities |
$ | 279,175 | $ | 21,922 | $ | 243,966 | $ | 25,876 | ||||||||
Money market balances are included in cash and cash equivalents as of December 31, 2011 and
June 30, 2011. Auction rate securities, or ARS, investments are included in non-current
investments as of December 31, 2011 and June 30, 2011.
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Changes in fair value of our Level 3 financial assets were as follows (in thousands):
Balance as of June 30, 2011 |
$ | 25,876 | ||
Net unrealized loss |
(1,807 | ) | ||
Impairment recovery of redeemed investments |
13 | |||
Redemptions |
(2,160 | ) | ||
Balance as of December 31, 2011 |
$ | 21,922 | ||
There were no transfers in or out of our Level 1 or 3 assets during the six months ended
December 31, 2011.
The fair values of our cash equivalents, accounts receivable, and accounts payable approximate
their carrying values because of the short-term nature of those instruments.
5. Auction Rate Securities
Our ARS investments have failed to settle in auctions and are not liquid. In the event we
need to access these funds prior to their maturity, we will not be able to do so without a loss of
principal, unless redeemed by the issuers or a future auction on these investments is successful.
During the three and six months ended December 31, 2011, $2.0 million and $2.2 million,
respectively, of our ARS investments were redeemed for a small discount from par. During the three
and six months ended December 31, 2010, $50,000 and $250,000, respectively, of our ARS investments
were redeemed at par.
As there are currently no active markets for our various failed ARS investments, we have
estimated the fair value as of December 31, 2011 using a trinomial discounted cash flow analysis.
The analysis considered, among other factors, the following:
| • | the collateral underlying the security investments; |
| • | creditworthiness of the counterparty; |
| • | timing of expected future cash flows; |
| • | the probability of a successful auction in a future period; |
| • | the underlying structure of each investment; |
| • | the present value of future principal and interest payments discounted at rates
considered to reflect current market conditions; |
| • | consideration of the probabilities of default, passing a future auction, or redemption
at par for each period; and |
| • | estimates of the recovery rates in the event of default for each investment. |
When possible, our failed ARS investments were compared to other observable market data or
securities with similar characteristics. Our estimate of the fair value of our ARS investments
could change materially from period to period based on future market conditions.
Contractual maturities for our ARS investments are generally greater than five years, with
fair value of $8.2 million maturing from calendar years 2015 to 2017, $6.5 million maturing from
calendar years 2040 to 2045, and $7.2 million having no stated maturity. Of our ARS investments,
$16.8 million par value are investment grade, and the remaining $18.5 million par value are below
investment grade.
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The various types of ARS investments we held as of December 31, 2011, including the original
cost basis, other-than-temporary impairment included in retained earnings, new cost basis,
unrealized gain/(loss), and fair value, consisted of the following (in thousands):
| Other-than- | ||||||||||||||||||||
| temporary | ||||||||||||||||||||
| Original Cost | Impairment in | New Cost | Unrealized | Fair | ||||||||||||||||
| Basis | Retained Earnings | Basis | Gain/(Loss) | Value | ||||||||||||||||
Student loans |
$ | 6,950 | $ | (189 | ) | $ | 6,761 | $ | (292 | ) | $ | 6,469 | ||||||||
Closed end municipal
and
corporate
funds |
7,850 | (54 | ) | 7,796 | (545 | ) | 7,251 | |||||||||||||
Credit linked notes |
13,500 | (8,765 | ) | 4,735 | 1,636 | 6,371 | ||||||||||||||
Preferred stock |
5,000 | (5,000 | ) | — | — | — | ||||||||||||||
Municipals |
2,000 | (83 | ) | 1,917 | (86 | ) | 1,831 | |||||||||||||
Total ARS |
$ | 35,300 | $ | (14,091 | ) | $ | 21,209 | $ | 713 | $ | 21,922 | |||||||||
All of the ARS investments in the above table with unrealized losses have been in a
continuous unrealized loss position for more than 12 months.
The various types of ARS investments we held as of June 30, 2011, including the original cost
basis, other-than-temporary impairment included in retained earnings, new cost basis, unrealized
gain/(loss), and fair value, consisted of the following (in thousands):
| Other-than- | ||||||||||||||||||||
| temporary | ||||||||||||||||||||
| Original Cost | Impairment in | New Cost | Unrealized | Fair | ||||||||||||||||
| Basis | Retained Earnings | Basis | Gain/(Loss) | Value | ||||||||||||||||
Student loans |
$ | 9,150 | $ | (242 | ) | $ | 8,908 | $ | (249 | ) | $ | 8,659 | ||||||||
Closed end municipal
and corporate funds |
7,850 | (54 | ) | 7,796 | (467 | ) | 7,329 | |||||||||||||
Credit linked notes |
13,500 | (8,765 | ) | 4,735 | 3,291 | 8,026 | ||||||||||||||
Preferred stock |
5,000 | (5,000 | ) | — | — | — | ||||||||||||||
Municipals |
2,000 | (83 | ) | 1,917 | (55 | ) | 1,862 | |||||||||||||
Total ARS |
$ | 37,500 | $ | (14,144 | ) | $ | 23,356 | $ | 2,520 | $ | 25,876 | |||||||||
All of the ARS investments in the above table with unrealized losses have been in a
continuous unrealized loss position for more than 12 months.
We have accounted for all of our ARS investments as non-current (included in non-current
investments in the accompanying condensed consolidated balance sheets) as we are not able to
reasonably determine when the ARS markets will recover or be restructured. Based on our ability to
access our cash, our expected operating cash flows, and our other sources of cash, we have the
intent and ability to hold these investments until the value recovers or the investments mature.
Subsequent to recording other-than-temporary impairment charges, certain of our ARS investments
have increased in value above their new cost bases, and this increase is included as unrealized
gain above and in accumulated other comprehensive income in the accompanying condensed consolidated
balance sheets.
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6. 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):
| December 31, | June 30, | |||||||
| 2011 | 2011 | |||||||
Raw materials |
$ | 23,440 | $ | 22,607 | ||||
Finished goods |
5,783 | 6,243 | ||||||
| $ | 29,223 | $ | 28,850 | |||||
7. Product Warranties, Indemnifications, and Contingencies
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 delivery costs. We assess the adequacy of our warranty obligations each reporting period and
adjust the accrued warranty liability on the basis of our estimates.
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.
Contingencies
We have in the past and may in the future receive notices from third parties that claim our
products infringe their intellectual property rights. We cannot be certain that our technologies
and products do not or will not infringe issued patents or other proprietary rights of third
parties.
Any infringement claims, with or without merit, could result in significant litigation costs
and diversion of management and financial resources, including the payment of damages, which could
have a material adverse effect on our business, financial condition, and results of operations.
8. Share-Based Compensation
Share-based compensation and the related tax benefit recognized in our consolidated statements
of income were as follows (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
Cost of revenue |
$ | 275 | $ | 369 | $ | 590 | $ | 677 | ||||||||
Research and development |
3,899 | 3,325 | 7,440 | 6,752 | ||||||||||||
Selling, general, and administrative |
4,326 | 5,757 | 8,636 | 9,928 | ||||||||||||
Total |
$ | 8,500 | $ | 9,451 | $ | 16,666 | $ | 17,357 | ||||||||
Income tax benefit on share-based
compensation |
$ | 2,865 | $ | 2,716 | $ | 4,880 | $ | 5,079 | ||||||||
Historically, we have issued new shares in connection with our share-based compensation plans.
However, treasury shares are also available, including shares repurchased under our common stock
repurchase program.
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Stock Options
Stock option activity and weighted average exercise prices for options outstanding and
exercisable, and the aggregate intrinsic value were as follows:
| Stock | Weighted | Aggregate | ||||||||||
| Option | Average | Intrinsic | ||||||||||
| Awards | Exercise | Value | ||||||||||
| Outstanding | Price | (in thousands) | ||||||||||
Balance at June 30, 2011 |
7,835,499 | $ | 24.71 | |||||||||
Granted |
842,086 | 25.27 | ||||||||||
Exercised |
(537,103 | ) | 20.77 | |||||||||
Forfeited |
(173,076 | ) | 26.37 | |||||||||
Balance at December 31, 2011 |
7,967,406 | 24.99 | $ | 46,061 | ||||||||
Exercisable at December 31,
2011 |
4,969,815 | 23.57 | $ | 36,339 | ||||||||
The aggregate intrinsic value was determined using the closing price of our common stock on
December 30, 2011, of $30.15, and excludes the impact of stock options that were not in-the-money.
Deferred Stock Units
DSU activity, including DSUs granted, delivered, and forfeited, and the balance and aggregate
intrinsic value of DSUs were as follows:
| Aggregate | ||||||||
| Intrinsic | ||||||||
| DSU Awards | Value | |||||||
| Outstanding | (in thousands) | |||||||
Balance at June 30, 2011 |
868,025 | |||||||
Granted |
400,720 | |||||||
Delivered |
(195,852 | ) | ||||||
Forfeited |
(44,525 | ) | ||||||
Balance at December 31, 2011 |
1,028,368 | $ | 31,005 | |||||
The aggregate intrinsic value was determined using the closing price of our common stock on
December 30, 2011, of $30.15.
Of the shares delivered, 50,369 shares valued at $1.5 million were withheld to meet
statutory minimum tax withholding requirements.
Employee Stock Purchase Plan
Shares purchased, weighted average purchase price, cash received, and the aggregate intrinsic
value for employee stock purchase plan purchases during the six-month period ended December 31,
2011 were as follows (in thousands, except for shares purchased and weighted average purchase
price):
Shares purchased |
110,200 | |||
Weighted average purchase price |
$ | 24.87 | ||
Cash received |
$ | 2,741 | ||
Aggregate intrinsic value |
$ | 970 |
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9. Income Taxes
We account for income taxes under the asset and liability method. We consider the operating
earnings of our foreign subsidiaries to be indefinitely invested outside the United States.
Accordingly, no provision has been made for the federal, state, or foreign taxes that may result
from future remittances of undistributed earnings of our foreign subsidiaries.
The provision for income taxes of $4.0 million and $2.0 million for the three months ended
December 31, 2011 and 2010, respectively, represented estimated federal, foreign, and state income
taxes. The effective tax rate for the three months ended December 31, 2011 was 18.8% and diverged
from the combined federal and state statutory rate primarily because of foreign income taxed at
lower tax rates and the federal and state research credit, partially offset by foreign withholding
taxes and net unrecognized tax benefits associated with qualified stock options. The effective tax
rate for the three months ended December 31, 2010 was 10.1% and diverged from the combined federal
and state statutory rate primarily because of foreign income taxed at lower tax rates, the
retroactive reinstatement of the federal research credit, and the state research credit, partially
offset by foreign withholding taxes and net unrecognized tax benefit associated with qualified
stock options.
The provision for income taxes of $7.5 million and $5.9 million for the six months ended
December 31, 2011 and 2010, respectively, represented estimated federal, foreign, and state income
taxes. The effective tax rate for the six months ended December 31, 2011 was 19.9% and diverged
from the combined federal and state statutory rate primarily because of foreign income taxed at
lower tax rates and the federal and state research credit, partially offset by foreign withholding
taxes and net unrecognized tax benefits associated with qualified stock options. The effective tax
rate for the six months ended December 31, 2010 was 13.9% and diverged from the combined federal
and state statutory rate primarily because of foreign income taxed at lower tax rates, the
retroactive reinstatement of the federal research credit, and the state research credit, partially
offset by foreign withholding taxes and net unrecognized tax benefit associated with qualified
stock options.
Tax benefit associated with share-based compensation was $2.9 million and $2.7 million for the
three months ended December 31, 2011 and 2010, respectively. Excluding the impact of share-based
compensation and the related tax benefit, the effective tax rate for the three months ended
December 31, 2011 and 2010 would have been 23.0% and 16.1%, respectively.
Tax benefit associated with share-based compensation was $4.9 million and $5.1 million for the
six months ended December 31, 2011 and 2010, respectively. Excluding the impact of share-based
compensation and the related tax benefit, the effective tax rate for the six months ended December
31, 2011 and 2010 would have been 22.8% and 18.4%, respectively.
The federal research credit expired on December 31, 2011. Generally, in the past when the
federal research credit has expired it has been retroactively reinstated. However, it is not clear
if the research credit will be retroactively reinstated or reinstated at all. As such, our tax
rate only reflects the benefit from the federal research credit through the expiration date.
In May 2011, we were notified by the Internal Revenue Service that our fiscal 2003 through
2006 and fiscal 2008 through 2010 will be subject to an audit. The early periods are being audited
in connection with a mandatory review of tax refunds in excess of $2.0 million when we carried back
our fiscal 2008 net operating loss. We are currently under audit, and no tax assessment has been
proposed. While we believe our unrecognized tax benefits associated with the years and issues
under audit are adequate, we can make no assurances that an assessment, if any, will not exceed our
accrued unrecognized tax benefits.
Unrecognized Tax Benefits
The total liability for gross unrecognized tax benefits increased $1.3 million during the six
months ended December 31, 2011 to $21.5 million from $20.2 million at June 30, 2011 and is included
in other liabilities on our condensed consolidated balance sheets. The liability for gross
unrecognized tax benefits, if recognized, would reduce the effective tax rate on income from
continuing operations. The increase was related to a current fiscal year tax position. The balance
of interest and penalties accrued related to unrecognized tax benefits as of December 31, 2011 was
$2.0 million and increased by $368,000 from June 30, 2011. We classify interest and penalties, if
any, as components of income tax expense.
While we are currently under audit and no tax assessment has been proposed, we anticipate the
audit will conclude within the next 12 months and could result in a change to our unrecognized tax
benefits. Any prospective adjustments to our unrecognized tax benefits will be recorded as an
increase or decrease to income tax expense and cause a corresponding change to our effective tax
rate. Accordingly, our effective tax rate could fluctuate materially from period to period.
Our major tax jurisdictions are the United States, California, and Hong Kong SAR, and fiscal
2003 onward remain subject to examination by one or more of these jurisdictions.
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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 personal computing, or PC, market and digital lifestyle product markets. The PC
market accounted for 46% and 45% of net revenue for the three months ended December 31, 2011 and
2010, respectively, and 49% and 48% of net revenue for the six months ended December 31, 2011 and
2010, respectively.
Net revenue within geographic areas based on our customers’ locations for the periods
presented was as follows (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
China |
$ | 93,835 | $ | 110,490 | $ | 183,773 | $ | 211,637 | ||||||||
Taiwan |
17,316 | 24,275 | 30,898 | 49,414 | ||||||||||||
Japan |
16,027 | 17,125 | 29,706 | 34,346 | ||||||||||||
Korea |
12,314 | 4,310 | 20,637 | 9,740 | ||||||||||||
Other |
5,978 | 3,381 | 13,902 | 7,629 | ||||||||||||
| $ | 145,470 | $ | 159,581 | $ | 278,916 | $ | 312,766 | |||||||||
The revenue from major customers as a percentage of total net revenue for the periods
presented were as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
Customer A |
15 | % | 10 | % | 14 | % | * | |||||||||
| * | Less than 10% |
We sell our products primarily to contract manufacturers that provide manufacturing services
to original equipment manufacturers, or OEMs. We extend credit based on an evaluation of a
customer’s financial condition, and we generally do not require collateral. Major customer
accounts receivable as a percentage of total accounts receivable at the dates presented were as
follows:
| As of | As of | |||||||
| December 31, | June 30, | |||||||
| 2011 | 2011 | |||||||
Customer A |
11 | % | * | |||||
Customer B |
10 | % | * | |||||
Customer C |
* | 12 | % | |||||
| * | Less than 10% |
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11. Comprehensive Income
Our comprehensive income generally consists of net income plus the effect of unrealized gains
and losses on our investments, primarily due to changes in market value of certain of our ARS
investments. In addition, we recognize the noncredit portion of other-than-temporary impairment on
debt securities in comprehensive income. We recognize foreign currency remeasurement adjustments
in our consolidated statement of income as the U.S. dollar is the functional currency of our
foreign entities.
Our comprehensive income was as follows (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 17,383 | $ | 17,678 | $ | 30,398 | $ | 36,377 | ||||||||
Net unrealized gain/(loss) on
available-for-sale
investments, net of tax |
84 | 143 | (1,807 | ) | 680 | |||||||||||
Total comprehensive income |
$ | 17,467 | $ | 17,821 | $ | 28,591 | $ | 37,057 | ||||||||
12. Subsequent Events
In January 2012, we received $5.6 million for the redemption of ARS investments at par
resulting in an impairment recovery of $36,000.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements and Factors That May Affect Results
You should read the following discussion and analysis in conjunction with our unaudited
condensed consolidated financial statements and notes in Item 1 and with our audited consolidated
financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2011.
In addition to the historical information contained in this report, this report may contain
forward-looking statements, including those related to our operating model and strategies; our
market penetration and market share in the PC and digital lifestyle product markets; competitive
factors in the PC and digital lifestyle product markets; revenue from the PC and digital lifestyle
product markets; industry estimates of growth rates of these markets; average selling prices;
product design mix; manufacturing costs; gross margins; customer relationships; research and
development expenses; selling, general, and administrative expenses; liquidity and anticipated cash
requirements; our ability to provide local sales, operational, and engineering support to
customers; our assessment of the combination of the added value we bring to our OEM customers’
products in meeting their custom design requirements and the impact of our ongoing cost improvement
programs; and our expectations regarding the timing of the conclusion of an ongoing tax audit.
These forward-looking statements involve risks and uncertainties that could cause actual results to
differ materially.
We caution that these statements are qualified by various factors that may affect future
results, including the following: economic conditions; changes in the market for our products and
the success of our customers’ products; our success in moving products from the design phase into
the manufacturing phase; changes in the competitive environment; infringement claims; warranty
obligations related to product failures; the failure of key technologies to deliver commercially
acceptable performance; our dependence on certain key markets; penetration into new markets; the
absence of both long-term purchase and supply commitments; and our lengthy development and product
acceptance cycles. This report should be read in conjunction with our Annual Report on Form 10-K
for the fiscal year ended June 30, 2011, including particularly Item 1A — Risk Factors.
Overview
We are a leading worldwide developer and supplier of custom-designed human interface solutions
that enable people to interact more easily and intuitively with a wide variety of mobile computing,
communications, entertainment, and other electronic devices. We believe our results to date
reflect the combination of our customer focus, the strength of our intellectual property, and our
engineering know-how, which allow us to develop or engineer products that meet the demanding design
specifications of OEMs.
Many of our customers have migrated their manufacturing operations from Taiwan to China, and
many of our OEM customers have established design centers in that region. With our expanded global
presence, including offices in China, Finland, Hong Kong, Japan, Korea, Switzerland, Taiwan, and
the United States, we are well positioned to provide local sales, operational, and engineering
support services to our existing customers, as well as potential new customers, on a global basis.
Our manufacturing operations are based on a variable cost model in which we outsource all of
our production requirements and generally drop ship our products directly to our customers from our
contract manufacturers’ facilities, eliminating the need for significant capital expenditures and
allowing us to minimize our investment in inventories. This approach requires us to work closely
with our contract manufacturers to ensure adequate production capacity to meet our forecasted
volume requirements. We provide our contract manufacturers with six-month rolling forecasts and
issue purchase orders based on our anticipated requirements for the next 90 days. However, we do
not have any long-term supply contracts with any of our contract manufacturers. We use three
third-party wafer manufacturers to supply wafers and two third-party packaging manufacturers to
package our proprietary ASICs. In certain cases, we rely on a single source or a limited number of
suppliers to provide other key components of our products. Our cost of revenue includes all costs
associated with the production of our products, including materials, logistics, manufacturing,
assembly, and test costs paid to third-party manufacturers and related overhead costs associated
with our indirect manufacturing operations personnel. Additionally, we charge all warranty costs,
yield losses, and any inventory provisions or write-downs to cost of revenue.
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Our gross margin generally reflects the combination of the added value we bring to our OEM
customers’ products in meeting their custom design requirements and the impact of our ongoing
cost-improvement programs. These cost-improvement programs include reducing materials and
component costs and implementing design and process improvements.
Our research and development expenses include costs for supplies and materials related to
product development as well as the engineering costs incurred to design human interface solutions
for OEM customers prior to and after their commitment to incorporate those solutions into their
products. These expenses have generally increased, reflecting our continuing commitment to the
technological and design innovation required to maintain our position in our existing markets and
to adapt our existing technologies or develop new technologies for new markets.
Selling, general, and administrative expenses include expenses related to sales, marketing,
and administrative personnel; internal sales and outside sales representatives’ commissions; market
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, growth in our existing
markets, and penetration into new markets.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates
during the six months ended December 31, 2011 compared with our critical accounting policies and
estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011.
Recent Accounting Pronouncements Not Yet Effective
In September 2011, the Financial Accounting Standards Board, or FASB, issued updated guidance
on goodwill impairment that gives companies the option to perform a qualitative assessment that may
allow them to skip the annual two-step test and reduce costs. The updated accounting guidance is
effective for fiscal years beginning after December 15, 2011. Early application is permitted. This
updated guidance becomes effective for us in the first quarter of our fiscal 2013. We do not expect
the adoption to have a material impact on our consolidated financial position, results of
operations, or cash flows.
In June 2011, the FASB issued new guidance on the presentation of comprehensive income. This
new guidance requires the components of net income and other comprehensive income to be either
presented in one continuous statement, referred to as the statement of comprehensive income, or in
two separate but consecutive statements. This new guidance eliminates the current option to report
other comprehensive income and its components in the statement of stockholders’ equity. While the
new guidance changes the presentation of comprehensive income, there are no changes to the
components that are recognized in net income or other comprehensive income under current accounting
guidance. This new guidance is effective for our fiscal 2013. As this guidance only amends the
presentation of the components of comprehensive income, the adoption will not have an impact on our
consolidated financial position, results of operations, or cash flows.
In May 2011, the FASB issued new guidance to achieve common fair value measurement and
disclosure requirements between U.S. GAAP and International Financial Reporting Standards. This new
guidance, which is effective beginning in our third quarter of fiscal 2012, amends current U.S.
GAAP fair value measurement and disclosure guidance to include increased transparency around
valuation inputs and investment categorization. We do not expect that the adoption will have a
material impact on our consolidated financial position, results of operations, or cash flows.
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Results of Operations
As the fiscal quarter and six-month period ended December 31, 2011 were 14- and 27-week
periods, respectively, and the fiscal quarter and six-month period ended December 31, 2010 were 13-
and 26-week periods, respectively, the condensed consolidated statements of income during the
fiscal quarter and six-month periods ended December 31, 2011 reflect an additional week of
activity.
Certain of our condensed consolidated statements of income data for the periods indicated,
together with comparative absolute and percentage changes in these amounts, were as follows (in
thousands, except percentages):
| Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||||||||||||||||||
| 2011 | 2010 | $ Change | % Change | 2011 | 2010 | $ Change | % Change | |||||||||||||||||||||||||
PC applications |
$ | 67,067 | $ | 71,026 | $ | (3,959 | ) | (5.6 | %) | $ | 135,898 | $ | 149,879 | $ | (13,981 | ) | (9.3 | %) | ||||||||||||||
Digital lifestyle product applications |
78,403 | 88,555 | (10,152 | ) | (11.5 | %) | 143,018 | 162,887 | (19,869 | ) | (12.2 | %) | ||||||||||||||||||||
Net revenue |
145,470 | 159,581 | (14,111 | ) | (8.8 | %) | 278,916 | 312,766 | (33,850 | ) | (10.8 | %) | ||||||||||||||||||||
Gross margin |
68,723 | 65,038 | 3,685 | 5.7 | % | 129,983 | 127,866 | 2,117 | 1.7 | % | ||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||||||
Research and development |
29,837 | 26,640 | 3,197 | 12.0 | % | 58,063 | 51,560 | 6,503 | 12.6 | % | ||||||||||||||||||||||
Selling, general, and administrative |
17,721 | 18,958 | (1,237 | ) | (6.5 | %) | 34,430 | 34,506 | (76 | ) | (0.2 | %) | ||||||||||||||||||||
Operating income |
21,165 | 19,440 | 1,725 | 8.9 | % | 37,490 | 41,800 | (4,310 | ) | (10.3 | %) | |||||||||||||||||||||
Interest income |
251 | 226 | 25 | 11.1 | % | 451 | 437 | 14 | 3.2 | % | ||||||||||||||||||||||
Interest expense |
(5 | ) | (5 | ) | — | — | (9 | ) | (9 | ) | — | — | ||||||||||||||||||||
Impairment (loss)/recovery on investments, net |
(7 | ) | — | (7 | ) | n/m | (1) | 13 | 10 | 3 | 30.0 | % | ||||||||||||||||||||
Income before provision for income
taxes |
21,404 | 19,661 | 1,743 | 8.9 | % | 37,945 | 42,238 | (4,293 | ) | (10.2 | %) | |||||||||||||||||||||
Provision for income taxes |
4,021 | 1,983 | 2,038 | 102.8 | % | 7,547 | 5,861 | 1,686 | 28.8 | % | ||||||||||||||||||||||
Net income |
$ | 17,383 | $ | 17,678 | $ | (295 | ) | (1.7 | %) | $ | 30,398 | $ | 36,377 | $ | (5,979 | ) | (16.4 | %) | ||||||||||||||
| (1) | not meaningful |
Certain of our condensed consolidated statements of income data as a percentage of net revenue
for the periods indicated were as follows:
| Percentage | Percentage | |||||||||||||||||||||||
| Three Months Ended | Point | Six Months Ended | Point | |||||||||||||||||||||
| December 31, | Increase/ | December 31, | Increase/ | |||||||||||||||||||||
| 2011 | 2010 | (Decrease) | 2011 | 2010 | (Decrease) | |||||||||||||||||||
PC applications |
46.1 | % | 44.5 | % | 1.6 | % | 48.7 | % | 47.9 | % | 0.8 | % | ||||||||||||
Digital lifestyle product applications |
53.9 | % | 55.5 | % | (1.6 | %) | 51.3 | % | 52.1 | % | (0.8 | %) | ||||||||||||
Net revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Gross margin |
47.2 | % | 40.8 | % | 6.4 | % | 46.6 | % | 40.9 | % | 5.7 | % | ||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Research and development |
20.5 | % | 16.7 | % | 3.8 | % | 20.8 | % | 16.5 | % | 4.3 | % | ||||||||||||
Selling, general, and administrative |
12.2 | % | 11.9 | % | 0.3 | % | 12.3 | % | 11.0 | % | 1.3 | % | ||||||||||||
Operating income |
14.5 | % | 12.2 | % | 2.3 | % | 13.4 | % | 13.4 | % | — | |||||||||||||
Income before provision for income taxes |
14.7 | % | 12.3 | % | 2.4 | % | 13.6 | % | 13.5 | % | 0.1 | % | ||||||||||||
Provision for income taxes |
2.8 | % | 1.2 | % | 1.6 | % | 2.7 | % | 1.9 | % | 0.8 | % | ||||||||||||
Net income |
11.9 | % | 11.1 | % | 0.8 | % | 10.9 | % | 11.6 | % | (0.7 | %) | ||||||||||||
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Net Revenue.
Net revenue was $145.5 million for the quarter ended December 31, 2011 compared with $159.6
million for the quarter ended December 31, 2010, a decrease of $14.1 million, or 8.8%. Of our
second quarter fiscal 2012 net revenue, $67.1 million, or 46.1%, was from PC applications and $78.4
million, or 53.9%, was from digital lifestyle product applications, including $76.3 million from
mobile products. The decrease in net revenue for the quarter ended December 31, 2011 was
attributable to a $10.2 million, or 11.5%, decrease in net revenue from digital lifestyle product
applications and a $3.9 million, or 5.6%, decrease in net revenue from PC applications. Net
revenue from mobile products was down due to a shift in revenue from higher priced full sensor
module solutions to lower priced chip or tail solutions, partially offset by an increase in mobile
product unit shipments. Net revenue from PC applications was down due primarily to lower PC
peripheral revenue.
Net revenue was $278.9 million for the six months ended December 31, 2011 compared with $312.8
million for the six months ended December 31, 2010, a decrease of $33.9 million, or 10.8%. Of our
first half fiscal 2012 net revenue, $135.9 million, or 48.7%, was from PC applications and $143.0
million, or 51.3%, was from digital lifestyle product applications, including $139.9 million from
mobile products. The decrease in net revenue for the six months ended December 31, 2011 was
attributable to a $19.9 million, or 12.2%, decrease in net revenue from digital lifestyle product
applications and a $14.0 million, or 9.3%, decrease in net revenue from PC applications. Net
revenue from mobile products was down due to a shift in revenue from higher priced full sensor
module solutions to lower priced chip or tail solutions, partially offset by an increase in mobile
product unit shipments. Net revenue from PC applications was down due primarily to lower PC
peripheral revenue.
Based on industry estimates of unit shipments, the notebook market is anticipated to increase
approximately 9% and the mobile smartphone market is anticipated to increase over 30% in calendar
year 2012 compared with calendar year 2011.
Gross Margin.
Gross margin as a percentage of net revenue was 47.2%, or $68.7 million, for the quarter ended
December 31, 2011 compared with 40.8%, or $65.0 million, for the quarter ended December 31, 2010.
The 640 basis point improvement in gross margin was primarily attributable to a shift in mobile
product revenue from lower margin full sensor module solutions to higher margin chip or tail
solutions.
Gross margin as a percentage of net revenue was 46.6%, or $130.0 million, for the six months
ended December 31, 2011 compared with 40.9%, or $127.9 million, for the six months ended December
31, 2010. The 570 basis point improvement in gross margin was primarily attributable to a shift in
mobile product revenue from lower margin full sensor module solutions to higher margin chip or tail
solutions.
As each custom-designed product solution we sell utilizes our capacitive sensing technology in
a design that is generally unique or specific to an OEM customer’s application, gross margin varies
on a product-by-product basis, making our cumulative gross margin a blend of our product specific
designs and independent of the vertical markets that our products serve. As a virtual
manufacturer, our gross margin percentage is generally not impacted materially by our shipment
volume. We charge write-downs to reduce the carrying value of obsolete, slow moving, and
non-usable inventory to net realizable value, including warranty costs, to cost of revenue.
Operating Expenses.
Research and Development Expenses. Research and development expenses increased as a
percentage of net revenue to 20.5% from 16.7%, and the expenses for research and development
activities increased $3.2 million, or 12.0%, to $29.8 million for the quarter ended December 31,
2011 compared with $26.6 million for the quarter ended December 31, 2010. The increase in research
and development expenses primarily reflected a $3.5 million increase in employee-related costs
related to a 12.0% increase in research and development staffing, a $636,000 increase in
infrastructure and support costs, and a $573,000 increase in share-based compensation costs,
partially offset by a $1.1 million decline in temporary services.
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Research and development expenses increased as a percentage of net revenue to 20.8% from
16.5%, and the expenses for research and development activities increased $6.5 million, or 12.6%,
to $58.1 million for the six months ended December 31, 2011 compared with $51.6 million for the six
months ended December 31, 2010. The increase in research and development expenses primarily
reflected a $6.6 million increase in employee-related costs related to a 12.8% increase in research
and development staffing, a $1.0 million increase in infrastructure and support costs, and a
$687,000 increase in share-based compensation costs, partially offset by a $1.5 million decline in
temporary services.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
increased as a percentage of net revenue to 12.2% from 11.9%, while the expenses for selling,
general, and administrative activities decreased $1.2 million, or 6.5%, to $17.7 million for the
three-month period ended December 31, 2011 compared with $19.0 million for the three-month period
ended December 31, 2010. The decrease in selling, general, and administrative expenses primarily
reflected a $2.7 million decrease in non-recurring costs related to the resignation of our former
Chief Executive Officer (“CEO”) in October 2010, partially offset by a $1.8 million increase in
continuing employee-related costs.
Selling, general, and administrative expenses increased as a percentage of net revenue to
12.3% from 11.0%, while the expenses for selling, general, and administrative activities remained
relatively flat at $34.4 million for the six-month period ended December 31, 2011 compared with
$34.5 million for the six-month period ended December 31, 2010. The selling, general, and
administrative expenses reflected a $2.7 million decrease in non-recurring costs related to the
resignation of our former CEO in October 2010, nearly entirely offset by a $2.5 million increase in
continuing employee related costs related to a 9.0% increase in selling, general, and
administrative staffing.
Provision for Income Taxes.
We account for income taxes under the asset and liability method. We consider the operating
earnings of our foreign subsidiaries to be indefinitely invested outside the United States.
Accordingly, no provision has been made for the federal, state, or foreign taxes that may result
from future remittances of undistributed earnings of our foreign subsidiaries.
The provision for income taxes of $4.0 million and $2.0 million for the three months ended
December 31, 2011 and 2010, respectively, represented estimated federal, foreign, and state income
taxes. The effective tax rate for the three months ended December 31, 2011 was 18.8% and diverged
from the combined federal and state statutory rate primarily because of foreign income taxed at
lower tax rates and the federal and state research credit, partially offset by foreign withholding
taxes and net unrecognized tax benefits associated with qualified stock options. The effective tax
rate for the three months ended December 31, 2010 was 10.1% and diverged from the combined federal
and state statutory rate primarily because of foreign income taxed at lower tax rates, the
retroactive reinstatement of the federal research credit, and the state research credit, partially
offset by foreign withholding taxes and net unrecognized tax benefit associated with qualified
stock options.
The provision for income taxes of $7.5 million and $5.9 million for the six months ended
December 31, 2011 and 2010, respectively, represented estimated federal, foreign, and state income
taxes. The effective tax rate for the six months ended December 31, 2011 was 19.9% and diverged
from the combined federal and state statutory rate primarily because of foreign income taxed at
lower tax rates and the federal and state research credit, partially offset by foreign withholding
taxes and net unrecognized tax benefits associated with qualified stock options. The effective tax
rate for the six months ended December 31, 2010 was 13.9% and diverged from the combined federal
and state statutory rate primarily because of foreign income taxed at lower tax rates, the
retroactive reinstatement of the federal research credit, and the state research credit, partially
offset by foreign withholding taxes and net unrecognized tax benefit associated with qualified
stock options.
Tax benefit associated with share-based compensation was $2.9 million and $2.7 million for the
three months ended December 31, 2011 and 2010, respectively. Excluding the impact of share-based
compensation and the related tax benefit, the effective tax rate for the three months ended
December 31, 2011 and 2010 would have been 23.0% and 16.1%, respectively.
Tax benefit associated with share-based compensation was $4.9 million and $5.1 million for the
six months ended December 31, 2011 and 2010, respectively. Excluding the impact of share-based
compensation and the related tax benefit, the effective tax rate for the six months ended December
31, 2011 and 2010 would have been 22.8% and 18.4%, respectively.
The federal research credit expired on December 31, 2011. Generally, in the past when the
federal research credit has expired it has been retroactively reinstated. However, it is not clear
if the research credit will be retroactively reinstated or reinstated at all. As such, our tax
rate only reflects the benefit from the federal research credit through the expiration date.
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In May 2011, we were notified by the Internal Revenue Service that our fiscal 2003 through
2006 and fiscal 2008 through 2010 will be subject to an audit. The early periods are being audited
in connection with a mandatory review of tax refunds in excess of $2.0 million when we carried back
our fiscal 2008 net operating loss. While we are currently under audit and no tax assessment has
been proposed, we anticipate the audit will conclude within the next twelve months.
Liquidity and Capital Resources
Our cash and cash equivalents were $282.5 million as of December 31, 2011 compared with $247.2
million as of June 30, 2011, an increase of $35.3 million. The increase reflects the combination
of $60.2 million provided from operating cash flows and $13.9 million of proceeds from the issuance
of shares under our share-based compensation plans, partially offset by $33.5 million used to
repurchase 1,391,323 shares of our common stock and $6.0 million used for the purchase of capital
equipment. We consider earnings of our foreign subsidiaries indefinitely invested overseas and
have made no provision for income or withholding taxes that may result from a future repatriation
of those earnings. As of December 31, 2011, $244.6 million of cash and cash equivalents was held
by our foreign subsidiaries. If these funds are needed for our operations in the United States, we
would be required to accrue and pay federal and state taxes to repatriate these funds.
Cash Flows from Operating Activities. Operating activities during the six months ended
December 31, 2011 generated net cash of $60.2 million compared with $43.5 million of net cash
generated during the six months ended December 31, 2010. For the six months ended December 31,
2011, net cash provided by operating activities was primarily attributable to net income of $30.4
million plus adjustments for non-cash charges of $21.9 million, and an $8.0 million net decrease in
operating assets and liabilities. The net decrease in operating assets and liabilities was
primarily attributable to a $7.1 million decrease in accounts receivable, a $2.9 million increase
in accounts payable, partially offset by a $2.2 million decrease in income taxes payable. Our days
sales outstanding decreased from 59 to 54 days from June 30, 2011 to December 31, 2011 and our
annual inventory turns remained at 11 for the same period.
Cash Flows from Investing Activities. Our investing activities primarily relate to purchases
of property and equipment. Investing activities during the six months ended December 31, 2011 used
net cash of $3.8 million compared with $6.7 million used during the six months ended December 31,
2010. During the six months ended December 31, 2011, net cash used in investing activities
consisted of $6.0 million used for the purchase of property and equipment, partially offset by
proceeds of $2.2 million from the sale of non-current investments.
Cash Flows from Financing Activities. Net cash used in financing activities for the six
months ended December 31, 2011 was $21.1 million compared with $30.2 million for the six months
ended December 31, 2010. Net cash used in financing activities for the six months ended December
31, 2011 primarily included $33.5 million used to repurchase 1,391,323 shares of our common stock,
partially offset by $13.9 million of proceeds from issuance of common stock under our share-based
compensation plans.
Common Stock Repurchase Program. In October 2011, our Board of Directors authorized an
additional $100.0 million for our common stock repurchase program, increasing the cumulative
authorization to $520.0 million. The program authorizes us to purchase our common stock in the
open market or in privately negotiated transactions depending upon market conditions and other
factors. The number of shares repurchased and the timing of repurchases is based on the level of
our cash balances, general business and market conditions, and other factors, including alternative
investment opportunities. We hold common stock repurchased under this program as treasury stock.
From April 2005 through December 31, 2011, we repurchased 14,757,799 shares of our common stock in
the open market for an aggregate cost of $385.7 million. Treasury shares purchased prior to August
28, 2008 were not subject to the stock split on that date, if adjusted for the stock split, the
average cost would be $19.98. We currently have $134.3 million available under our common stock
repurchase program, which expires in October 2013.
Bank Credit Facility. We currently maintain a $50.0 million working capital line of credit
with Wells Fargo Bank. The Wells Fargo Bank revolving line of credit, which expires on September
1, 2012, provides for an interest rate equal to the prime lending rate or 250 basis points above
LIBOR, depending on whether we choose a variable or fixed rate, respectively. We had not borrowed
any amounts under the line of credit as of December 31, 2011.
$250 Million Shelf Registration. We have registered an aggregate of $250.0 million of common
stock (including the associated rights), preferred stock, debt securities, depositary shares,
warrants, purchase contracts, and units (collectively “securities”) for issuance to raise funds for
general corporate purposes, which may include the repayment of indebtedness outstanding from time
to time, working capital, capital expenditures, acquisitions, and repurchases of our common stock
or other securities. Securities issued under the shelf registration generally will be freely
tradeable after their issuance unless held by an affiliate of our company, in which case such
shares will be subject to the volume and manner of sale restrictions of Rule 144.
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$100 Million Shelf Registration. We have registered an aggregate of $100.0 million of common
stock and preferred stock for issuance in connection with acquisitions, which shares generally will
be freely tradeable after their issuance under Rule 145 of the Securities Act unless held by an
affiliate of the acquired company, in which case such shares will be subject to the volume and
manner of sale restrictions of Rule 144.
Liquidity and Capital Resources. We believe our existing cash and cash equivalents and
anticipated cash flows from operating activities will be sufficient to meet our working capital and
other cash requirements for at least the next 12 months. Our future capital requirements will
depend on many factors, including our revenue, the timing and extent of spending to support product
development efforts, costs related to protecting our intellectual property, the expansion of sales
and marketing activities, the timing of introductions of new products and enhancements to existing
products, the costs to ensure access to adequate manufacturing capacity, the costs of maintaining
sufficient space for our expanding workforce, the continuing market acceptance of our product
solutions, our common stock repurchase program, and the amount and timing of our investments in, or
acquisitions of, other technologies or companies. Further equity or debt financing may not be
available to us on acceptable terms or at all. If sufficient funds are not available or are not
available on acceptable terms, our ability to take advantage of unexpected business opportunities
or to respond to competitive pressures could be limited or severely constrained.
Our non-current investments consist of ARS investments, which have failed to settle in
auctions. These failures generally resulted in the interest rates resetting from LIBOR plus 50
basis points to LIBOR plus 225 basis points on the regularly scheduled auction dates. These
investments are not liquid, and in the event we need to access these funds, we will not be able to
do so without a loss of principal, unless redeemed by the issuers or a future auction on these
investments is successful.
Based on our ability to access our cash and cash equivalents, our expected operating cash
flows, and our other sources of cash, we do not anticipate the lack of liquidity on these
investments will affect our ability to operate our business as usual.
Contractual Obligations and Commercial Commitments
Our material contractual obligations and commercial commitments as of December 31, 2011 were
as follows (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) |
$ | 3 | $ | — | $ | — | $ | — | $ | 3 | ||||||||||
Leases |
9 | 3 | 3 | 1 | 2 | |||||||||||||||
Purchase obligations and other commitments (2) |
17 | 9 | 8 | — | — | |||||||||||||||
Total |
$ | 29 | $ | 12 | $ | 11 | $ | 1 | $ | 5 | ||||||||||
| (1) | Represents both principal and interest payable through the maturity date of the underlying
contractual obligations. |
|
| (2) | Purchase obligations and other commitments include payments due under a long-term services
agreement and inventory purchase obligations with contract manufacturers. |
The amounts in the table above exclude unrecognized tax benefits of $21.5 million. Although we
were under audit by a tax agency as of December 31, 2011, we anticipate the audit will conclude
within the next 12 months and as a result our unrecognized tax benefits could change.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our market risk has not changed significantly from the interest rate and foreign currency
exchange risks disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended
June 30, 2011.
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| 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 and are effective 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 of 1934, as amended, within the time periods specified by the SEC’s rules
and forms.
During the fiscal quarter covered by this report, 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.
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PART II — OTHER INFORMATION
| ITEM 1A. | RISK FACTORS |
There have been no significant changes in our Risk Factors during the three months ended
December 31, 2011, compared with the Risk Factors disclosed in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2011.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Issuer Purchases of Equity Securities
In October 2011, our Board of Directors authorized an additional $100.0 million for our common
stock repurchase program, bringing the cumulative authorization to $520.0 million, and extended the
expiration date of the balance remaining in the program. After the approval of the additional
$100.0 million, the remaining amount authorized for the repurchase of our common stock through
October 2013 is $134.3 million. There were no repurchases under our common stock repurchase
program during the three-month period ended December 31, 2011.
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| 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 |
|||
| 101.INS* | XBRL Instance Document |
|||
| 101.SCH* | XBRL Taxonomy Extension Schema Document |
|||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
|||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
|||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
|||
| * | Pursuant to Rule 406T of Regulation S-T, these interactive data files are
deemed not filed or part of a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and
otherwise are not subject to liability under those sections. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SYNAPTICS INCORPORATED |
||||
| Date: February 3, 2012 | By: | /s/ Richard A. Bergman | ||
| Name: | Richard A. Bergman | |||
| Title: | President and Chief Executive Officer | |||
| Date: February 3, 2012 | By: | /s/ Kathleen A. Bayless | ||
| Name: | Kathleen A. Bayless | |||
| Title: | Senior Vice President, Chief Financial Officer, Secretary, and Treasurer | |||
25
EXHIBIT 31.1
Certification of Chief Executive Officer
I, Richard A. Bergman, 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 registrant’s 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 registrant’s 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 registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.
Date:
February 3, 2012
| /s/ Richard A. Bergman | ||||
| Richard A. Bergman | ||||
| Chief Executive Officer | ||||
EXHIBIT 31.2
Certification of Chief Financial Officer
I, Kathleen A. Bayless, 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 registrant’s 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 registrant’s 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 registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.
Date:
February 3, 2012
| /s/ Kathleen A. Bayless | ||||
| Kathleen A. Bayless | ||||
| Chief Financial Officer | ||||
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 December 31, 2011 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, Richard A. Bergman, Chief Executive Officer of the
Company, certify, to the best of my knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | 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) | The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
/s/ Richard A. Bergman
|
||
Chief Executive Officer |
||
February 3, 2012 |
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 December 31, 2011 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, Kathleen A. Bayless, Chief Financial Officer of
the Company, certify, to the best of my knowledge and belief, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | 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) | The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
/s/ Kathleen A. Bayless
|
||
Chief Financial Officer |
||
February 3, 2012 |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This website contains forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business, and can be identified by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements may include words such as "expect," "anticipate," "intend," "believe," "estimate," "plan," "target," "strategy," "continue," "may," "will," "should," variations of such words, or other words and terms of similar meaning. All forward-looking statements reflect our best judgment and are based on several factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Such factors include, but are not limited to, the risks as identified in the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" sections of our Annual Report on Form 10-K for our most recent fiscal year, and other risks as identified from time to time in our Securities and Exchange Commission reports. Forward-looking statements are based on information available to us on the date hereof, and we do not have, and expressly disclaim, any obligation to publicly release any updates or any changes in our expectations, or any change in events, conditions, or circumstances on which any forward-looking statement is based. Our actual results and the timing of certain events could differ materially from the forward-looking statements. These forward-looking statements do not reflect the potential impact of any mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing.