UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended March 28, 2015

Commission file number 000-49602

 

SYNAPTICS INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

77-0118518

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1251 McKay Drive

San Jose, California 95131

(Address of principal executive offices) (Zip code)

(408) 904-1100

(Registrant’s telephone number, including area code)

 

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  x    No  ¨

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  x    No  ¨

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

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

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  ¨    No  x

Number of shares of Common Stock outstanding at April 24, 2015: 36,831,918

 

 

 

 

 


 

SYNAPTICS INCORPORATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 28, 2015

TABLE OF CONTENTS

 

 

 

 

  

 

  

Page

Part I. Financial Information

  

 

 

 

 

 

   

 

Item 1.

   

Condensed Consolidated Financial Statements (Unaudited):

  

3

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets—March 31, 2015 and June 30, 2014

  

3

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Income (Loss)—Three and Nine Months Ended March 31, 2015 and 2014

  

4

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Comprehensive Income (Loss)—Three and Nine Months Ended March 31, 2015 and 2014

  

5

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows—Nine Months Ended March 31, 2015 and 2014

  

6

 

 

 

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements

  

7

 

 

 

 

 

 

Item 2.

  

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

  

20

 

 

 

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

28

 

 

 

 

 

 

Item 4.

  

Controls and Procedures

  

29

 

 

Part II. Other Information

  

 

 

 

 

 

 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

30

 

 

 

 

 

 

Item 6.

  

Exhibits

  

31

 

 

Signatures

  

32

 

 

 

 


 

PART I—FINANCIAL INFORMATION

 

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

 

 

March 31,

 

 

June 30,

 

 

 

2015

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

380,579

 

 

$

447,205

 

Accounts receivable, net of allowances of  $1,800 and $883

   at March 31, 2015 and June 30, 2014, respectively

 

 

319,567

 

 

 

195,057

 

Inventories

 

 

152,261

 

 

 

82,311

 

Prepaid expenses and other current assets

 

 

27,634

 

 

 

17,858

 

Total current assets

 

 

880,041

 

 

 

742,431

 

Property and equipment at cost, net of accumulated depreciation of $66,662

   and $49,482 at March 31, 2015 and June 30, 2014, respectively

 

 

117,692

 

 

 

80,849

 

Goodwill

 

 

215,244

 

 

 

61,030

 

Acquired intangibles, net

 

 

254,357

 

 

 

82,111

 

Non-current other assets

 

 

43,883

 

 

 

53,912

 

 

 

$

1,511,217

 

 

$

1,020,333

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

182,021

 

 

$

97,109

 

Accrued compensation

 

 

32,217

 

 

 

30,682

 

Income taxes payable

 

 

34,136

 

 

 

12,538

 

Acquisition-related liabilities

 

 

42,976

 

 

 

57,388

 

Other accrued liabilities

 

 

96,908

 

 

 

56,691

 

Current portion of long-term debt

 

 

9,375

 

 

 

 

Total current liabilities

 

 

397,633

 

 

 

254,408

 

Long-term debt, net of issuance costs

 

 

234,581

 

 

 

 

Acquisition-related liabilities

 

 

72,734

 

 

 

52,734

 

Deferred tax liabilities

 

 

43,341

 

 

 

 

Other long-term liabilities

 

 

14,634

 

 

 

12,034

 

Total  liabilities

 

 

762,923

 

 

 

319,176

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

$0.001 par value; 120,000,000  shares authorized,

   57,392,290 and 55,911,513 shares issued, and 36,798,673 and 36,863,802

   shares outstanding, at March 31, 2015 and June 30, 2014, respectively

 

 

57

 

 

 

56

 

Additional paid-in capital

 

 

819,462

 

 

 

740,282

 

Treasury stock: 20,593,617 and 19,047,711 common treasury shares at

   March 31, 2015 and June 30, 2014, respectively, at cost

 

 

(641,022

)

 

 

(530,422

)

Accumulated other comprehensive income

 

 

8,075

 

 

 

8,560

 

Retained earnings

 

 

561,722

 

 

 

482,681

 

Total stockholders' equity

 

 

748,294

 

 

 

701,157

 

 

 

$

1,511,217

 

 

$

1,020,333

 

 

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

 

 

 

3


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net revenue

 

$

477,598

 

 

$

204,271

 

 

$

1,224,044

 

 

$

632,641

 

Cost of revenue

 

 

313,253

 

 

 

111,841

 

 

 

812,679

 

 

 

336,387

 

Gross margin

 

 

164,345

 

 

 

92,430

 

 

 

411,365

 

 

 

296,254

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

78,719

 

 

 

49,412

 

 

 

213,467

 

 

 

135,785

 

Selling, general, and administrative

 

 

35,803

 

 

 

25,856

 

 

 

88,532

 

 

 

69,825

 

Acquired intangibles amortization

 

 

4,658

 

 

 

262

 

 

 

9,577

 

 

 

785

 

Change in contingent consideration

 

 

(6,688

)

 

 

53,043

 

 

 

(18,311

)

 

 

56,731

 

Total operating expenses

 

 

112,492

 

 

 

128,573

 

 

 

293,265

 

 

 

263,126

 

Operating income/(loss)

 

 

51,853

 

 

 

(36,143

)

 

 

118,100

 

 

 

33,128

 

Interest and other income, net

 

 

349

 

 

 

516

 

 

 

1,470

 

 

 

1,422

 

Interest expense

 

 

(1,317

)

 

 

 

 

 

(2,529

)

 

 

(9

)

Income/(loss) before provision for income taxes

 

 

50,885

 

 

 

(35,627

)

 

 

117,041

 

 

 

34,541

 

Provision for income taxes

 

 

19,407

 

 

 

4,429

 

 

 

38,000

 

 

 

22,324

 

Net income/(loss)

 

$

31,478

 

 

$

(40,056

)

 

$

79,041

 

 

$

12,217

 

Net income/(loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.86

 

 

$

(1.12

)

 

$

2.15

 

 

$

0.36

 

Diluted

 

$

0.82

 

 

$

(1.12

)

 

$

2.04

 

 

$

0.33

 

Shares used in computing net income/(loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

36,726

 

 

 

35,685

 

 

 

36,839

 

 

 

34,212

 

Diluted

 

 

38,535

 

 

 

35,685

 

 

 

38,797

 

 

 

36,532

 

 

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

 

 

 

4


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income/(loss)

 

$

31,478

 

 

$

(40,056

)

 

$

79,041

 

 

$

12,217

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized net gain on investments

 

 

347

 

 

 

306

 

 

 

561

 

 

 

1,597

 

Reclassification from accumulated other comprehensive

   income to interest income for accretion of

   non-current investments

 

 

(377

)

 

 

(278

)

 

 

(1,046

)

 

 

(751

)

Net current-period other comprehensive income/(loss)

 

 

(30

)

 

 

28

 

 

 

(485

)

 

 

846

 

Comprehensive income/(loss)

 

$

31,448

 

 

$

(40,028

)

 

$

78,556

 

 

$

13,063

 

 

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

 

 

 

5


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

March 31,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

79,041

 

 

$

12,217

 

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

 

 

 

 

 

 

 

 

Share-based  compensation costs

 

 

31,837

 

 

 

23,439

 

Depreciation and amortization

 

 

17,251

 

 

 

10,353

 

Acquired intangibles amortization

 

 

68,654

 

 

 

4,759

 

Accretion and remeasurement of contingent consideration liability

 

 

(18,311

)

 

 

56,731

 

Deferred taxes

 

 

(13,637

)

 

 

8,483

 

Impairment recovery on investments

 

 

(179

)

 

 

 

Non-cash interest income

 

 

(1,046

)

 

 

(751

)

Amortization of debt issuance costs

 

 

504

 

 

 

 

Foreign currency remeasurement gain

 

 

(7,363

)

 

 

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

5,780

 

 

 

2,607

 

Inventories

 

 

(63,636

)

 

 

(18,086

)

Prepaid expenses and other current assets

 

 

30,929

 

 

 

(673

)

Other assets

 

 

8,622

 

 

 

(8,727

)

Accounts payable

 

 

26,441

 

 

 

(5,823

)

Accrued compensation

 

 

(1,750

)

 

 

(2,339

)

Income taxes payable

 

 

(7,123

)

 

 

(4,259

)

Other accrued liabilities

 

 

16,518

 

 

 

13,172

 

Net cash provided by operating activities

 

 

172,532

 

 

 

91,103

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from sales of non-current investments

 

 

4,900

 

 

 

 

Acquisition of business, net of cash acquired

 

 

(294,282

)

 

 

(19,620

)

Purchases of property and equipment

 

 

(40,864

)

 

 

(32,321

)

Net cash used in investing activities

 

 

(330,246

)

 

 

(51,941

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payment of acquisition-related liabilities

 

 

(63,761

)

 

 

 

Purchases of treasury stock

 

 

(110,600

)

 

 

(70,262

)

Proceeds from issuance of shares

 

 

24,480

 

 

 

62,997

 

Proceeds from issuance of long-term debt

 

 

245,367

 

 

 

 

Payment of debt issuance costs

 

 

(400

)

 

 

 

Excess tax benefit from share-based compensation

 

 

13,223

 

 

 

12,946

 

Payroll taxes for deferred stock and market stock units

 

 

(12,062

)

 

 

(6,406

)

Payment of debt

 

 

(1,875

)

 

 

(2,259

)

Net cash provided by/(used in) financing activities

 

 

94,372

 

 

 

(2,984

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(3,284

)

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

 

(66,626

)

 

 

36,178

 

Cash and cash equivalents at beginning of period

 

 

447,205

 

 

 

355,303

 

Cash and cash equivalents at end of period

 

$

380,579

 

 

$

391,481

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for  taxes

 

$

41,945

 

 

$

15,311

 

Non-cash investing  and financing activities:

 

 

 

 

 

 

 

 

Property and equipment received but unpaid

 

$

4,833

 

 

$

1,890

 

Common stock issued pursuant to acquisition

 

$

 

 

$

70,280

 

Common stock issued in settlement of contingent consideration liability

 

$

21,487

 

 

$

37,499

 

 

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

 

6


 

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 SEC rules and regulations. In our opinion, the financial statements include all adjustments, which are of a normal and recurring nature and necessary for the fair presentation of the results of the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future period. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended June 28, 2014.

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 2015 and 2014 years are 52-week periods ending on June 27, 2015 and June 28, 2014, respectively. The quarterly fiscal periods presented in this report were 13-week periods for the three months ended March 28, 2015 and March 29, 2014, respectively. For ease of presentation, the accompanying consolidated financial statements have been shown as ending on calendar quarter end dates as of and for all periods presented, 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, loss on purchase commitments, product warranty, share-based compensation costs, provision for income taxes, deferred income tax asset valuation allowances, uncertain tax positions, goodwill, intangible assets, investments, contingent consideration liabilities, and loss contingencies. We base our estimates on historical experience, applicable laws and regulations, and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Foreign Currency Transactions and Foreign Exchange Contracts

We use the U.S. dollar as our functional currency for financial reporting and therefore foreign currency transaction and remeasurement gains and losses are included in results of operations and are primarily the result of revaluing assets and liabilities denominated in a currency other than the functional currency. These foreign currency transactions and remeasurement gains and losses, which primarily related to our recent acquisition of Renesas SP Drivers, Inc., resulted in a net loss of $0.8 million in the three months ended March 28, 2015, and a net gain of $14.1 million in the nine months ended March 28, 2015, and are included in selling, general, and administrative expenses in the condensed consolidated statements of income.  Amounts resulting from such foreign currency transactions were not material in the similar prior year periods.

We also enter into foreign currency contracts to manage exposure related to certain foreign currency obligations.  The foreign currency contracts are not designated as hedging instruments and, accordingly, are not subject to hedge accounting.  In March 2015, we entered into foreign currency forward contracts to purchase Japanese yen, using U.S. dollars. As of March 31, 2015, we had outstanding foreign currency forward contracts totaling ¥6.0 billion for a total of $50.0 million, at an average exchange rate of 120.47.  The value date of the foreign currency forward contracts is March 11, 2016.  The net fair value of the outstanding foreign currency forward contracts is disclosed in Note 4 Fair Value, and is recorded as an asset under prepaid expenses and other current assets in the condensed consolidated balance sheets.  In the three months ended March 31, 2015, we recognized net unrealized gains of $0.7 million on the foreign currency forward contracts, which are recorded in selling, general, and administrative expenses in the condensed consolidated statements of income.

 

 

 

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,

7


 

incentives, and other allowances at the time we recognize revenue. Our products contain embedded firmware and software, which together with, or consisting of, our ASIC chip, deliver the essential functionality of our products and, as such, software revenue recognition guidance is not applicable.

 

 

3. Net Income/(Loss) Per Share

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

31,478

 

 

$

(40,056

)

 

$

79,041

 

 

$

12,217

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares, basic

 

 

36,726

 

 

 

35,685

 

 

 

36,839

 

 

 

34,212

 

Effect of dilutive share-based awards

 

 

1,809

 

 

 

 

 

 

1,958

 

 

 

2,320

 

Shares, diluted

 

 

38,535

 

 

 

35,685

 

 

 

38,797

 

 

 

36,532

 

Net income/(loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.86

 

 

$

(1.12

)

 

$

2.15

 

 

$

0.36

 

Diluted

 

$

0.82

 

 

$

(1.12

)

 

$

2.04

 

 

$

0.33

 

Our basic net income/(loss) 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 market stock units, or MSUs.

Dilutive net income/(loss) per share amounts do not include the potential weighted average effect of 380,506 and 2,481,307 shares of common stock related to certain share-based awards that were outstanding during the three months ended March 31, 2015 and 2014, respectively, and 370,296 and 356,878 shares of common stock related to certain share-based awards that were outstanding during the nine months ended March 31, 2015 and 2014, respectively. These share-based awards were not included in the computation of diluted net income/(loss) per share because their effect would have been antidilutive.

 

 

4. Fair Value

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):

 

 

 

March 31,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Level 1

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

347,778

 

 

$

 

 

$

 

 

$

439,675

 

 

$

 

Auction rate securities

 

 

 

 

 

 

 

 

15,625

 

 

 

 

 

 

19,785

 

Total available-for-sale securities

 

$

347,778

 

 

$

 

 

$

15,625

 

 

$

439,675

 

 

$

19,785

 

Foreign currency contract assets

 

$

 

 

$

693

 

 

$

 

 

$

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration liabilities recorded for business combinations

 

$

 

 

$

 

 

$

55,121

 

 

$

 

 

$

110,122

 

 

In our condensed consolidated balance sheets as of March 31, 2015 and June 30, 2014, money market balances were included in cash and cash equivalents and auction rate securities, or ARS investments, were included in non-current other assets; $600,000 of the ARS investments were included in prepaid expenses and other current assets as of March 31, 2015.

We measure our foreign currency contracts at fair value on a recurring basis.  We utilized Level 2 inputs to value the foreign currency forward contracts.  Specifically, we utilized quoted prices for similar assets or liabilities in markets that are not active.  Key

8


 

inputs for the foreign currency forward contracts are currency and interest forward rates.  The foreign currency contracts were included in prepaid expenses and other current assets as of March 31, 2015.  

The contingent consideration liability recorded for business combinations was included in acquisition-related liabilities as of March 31, 2015 and June 30, 2014, respectively.

Changes in fair value of our Level 3 financial assets as of March 31, 2015 were as follows (in thousands):

 

Balance as of June 30, 2014

 

$

19,785

 

Net gain

 

 

740

 

Redemptions

 

 

(4,900

)

Balance as of March 31, 2015

 

$

15,625

 

 

Changes in fair value of our Level 3 contingent consideration liabilities as of March 31, 2015 were as follows (in thousands):

 

Balance as of June 30, 2014

 

$

110,122

 

Cash settlement of contingent consideration liability

 

 

(15,203

)

Issuance of common stock in settlement of liability

 

 

(21,487

)

Accretion and remeasurement

 

 

(18,311

)

Balance as of March 31, 2015

 

$

55,121

 

 

In connection with our acquisition of Validity Sensors, Inc., or Validity, we entered into a contingent consideration arrangement. As of March 31, 2015, we may be required to make additional cash payments of up to $122.5 million as consideration to the former Validity stockholders and option holders based on unit sales of products utilizing Validity technology through March 2016.

In connection with our acquisition of Pacinian Corporation, or Pacinian, we entered into a contingent consideration arrangement. As of March 31, 2015, we may be required to make additional cash payments of up to $10.0 million as consideration to the former Pacinian stockholders based on unit sales of products utilizing ThinTouch technology through June 2016.

Changes in the fair value of our contingent consideration liabilities subsequent to the Validity and Pacinian acquisitions are included in operating expenses as change in contingent consideration in the condensed consolidated statements of income (loss). Cash payments of contingent consideration are classified in the condensed consolidated statements of cash flows as a financing activity up to the amount of the contingent consideration recorded at the time of the acquisition, and as an operating activity for cash payments that exceed the liability recorded at the time of acquisition.

There were no transfers in or out of our Level 1, 2, or 3 assets or liabilities during the three and nine months ended March 31, 2015 and 2014.

The fair values of our accounts receivable and accounts payable approximate their carrying values because of the short-term nature of those instruments. Intangible assets, property and equipment, and goodwill are measured at fair value on a non-recurring basis if impairment is indicated. The interest rate on our bank debt is variable, which is subject to change from time to time to reflect a market interest rate; accordingly, the carrying value of our bank debt approximates fair value.

 

 

5. Non-Current Other Assets

Our non-current investments, which are included in non-current other assets in the condensed consolidated balance sheets, consist of ARS investments, which 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 nine months ended March 31, 2015, $4.9 million of our ARS investments were redeemed at par value.

As there are currently no active markets for our ARS investments, we have estimated the fair value of these investments as of March 31, 2015 using a trinomial discounted cash flow analysis. The analysis considered, among others, the following factors:

·

the collateral underlying the security investments;

·

the creditworthiness of the counterparty;

·

the timing of expected future cash flows;

9


 

·

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;

·

a consideration of the probabilities of default, a successful 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 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.

We have ARS investments with a fair value of $12.8 million maturing from fiscal years 2016 to 2018 and $2.8 million fair value with no maturity date. Of our ARS investments, $600,000 par value are investment grade, and the remaining $18.5 million par value are below investment grade.

The various types of ARS investments we held as of March 31, 2015, including the original cost basis, other-than-temporary impairment included in retained earnings, new cost basis, unrealized gain, and fair value, consisted of the following (in thousands):

 

 

 

Original Cost Basis

 

 

Other-than-

temporary

Impairment in

Retained Earnings

 

 

New Cost Basis

 

 

Unrealized

Gain

 

 

Fair Value

 

Credit linked notes

 

$

13,500

 

 

$

(6,467

)

(1)

$

7,033

 

 

$

5,248

 

 

$

12,281

 

Preferred stock

 

 

5,000

 

 

 

(5,000

)

 

 

 

 

 

2,750

 

 

 

2,750

 

Municipals

 

 

600

 

 

 

(83

)

 

 

517

 

 

 

77

 

 

 

594

 

  Total ARS

 

$

19,100

 

 

$

(11,550

)

 

$

7,550

 

 

$

8,075

 

 

$

15,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Other-than-temporary impairment in retained earnings is partially offset by cumulative accretion of $2.3 million on non-current investments.  Accretion is reclassified from accumulated other comprehensive income and recorded in the condensed consolidated statements of income as non-cash interest income.

 

The various types of ARS investments we held as of June 30, 2014, 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):

 

 

 

Original Cost Basis

 

 

Other-than-

temporary

Impairment in

Retained Earnings

 

 

New Cost Basis

 

 

Unrealized

Gain/(Loss)

 

 

Fair Value

 

Student loans

 

$

3,500

 

 

$

(179

)

 

$

3,321

 

 

$

(149

)

 

$

3,172

 

Credit linked notes

 

 

13,500

 

 

 

(7,513

)

(1)

 

5,987

 

 

 

5,891

 

 

 

11,878

 

Preferred stock

 

 

5,000

 

 

 

(5,000

)

 

 

 

 

 

2,750

 

 

 

2,750

 

Municipals

 

 

2,000

 

 

 

(83

)

 

 

1,917

 

 

 

68

 

 

 

1,985

 

Total ARS

 

$

24,000

 

 

$

(12,775

)

 

$

11,225

 

 

$

8,560

 

 

$

19,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Other-than-temporary impairment in retained earnings is partially offset by cumulative accretion of $1.3 million on non-current investments.  Accretion is reclassified from accumulated other comprehensive income and recorded in the condensed consolidated statements of income as non-cash interest income.

 

 

The student loan ARS investments in the above table with unrealized losses have been in a continuous unrealized loss position for more than 12 months.

10


 

We have accounted for all of our ARS investments with maturity dates of more than 12 months from the balance sheet date as non-current 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 and cash equivalents, our expected operating cash flows, and our other sources of cash, we do not intend to sell the ARS investments, and it is not more likely than not that we will be required to sell the investments before the recovery of the amortized cost basis.

 

 

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):

 

 

 

March 31,

 

 

June 30,

 

 

 

2015

 

 

2014

 

Raw materials

 

$

83,772

 

 

$

58,717

 

Finished goods

 

 

68,489

 

 

 

23,594

 

 

 

$

152,261

 

 

$

82,311

 

 

 

7. Acquisition

On June 11, 2014, we entered into a stock purchase agreement to acquire all of the outstanding stock of Renesas SP Drivers, Inc., or RSP, a leading provider of small- and medium-sized display driver integrated circuits for smartphones and tablets, or the RSP Acquisition. The RSP Acquisition is intended to accelerate our product roadmap for high-performance, low-cost display integration products, strengthen our relationships with key customers, and create opportunities to drive increased revenue. Effective as of October 1, 2014, or the Closing Date, we completed the RSP Acquisition of 100% of the outstanding capital stock of RSP for an initial purchase price of approximately ¥50.6 billion (or approximately $463 million), with Japanese yen converted into U.S. dollars at the Closing Date conversion rate of 109.4 Japanese yen to one U.S. dollar. The purchase price the Closing Date was paid entirely in cash, with ¥7.25 billion (or approximately $66 million) held back until the date that is 18 months after the Closing Date to address any post-closing adjustments or claims, or the Indemnification Holdback, and ¥5.25 billion (or approximately $48 million) held back in respect of a potential post-closing working capital, cash balance, indebtedness and transaction expenses adjustments, or the Working Capital Holdback.  Subsequent to the Closing Date, we determined that $4.8 million of additional purchase consideration was due to the sellers pursuant to the requirements of the Working Capital Holdback and have adjusted the purchase price to $468 million.  We anticipate settlement of the Indemnification Holdback to occur in the fourth quarter of fiscal 2016.

The Working Capital Holdback as adjusted for additional purchase consideration was settled in our quarter ended March 31, 2015 for a total of ¥5.78 billion (or $48.6 million). The Indemnification Holdback is included in acquisition-related liabilities in the long-term liabilities section of the condensed consolidated balance sheet and is expected to be settled in our fiscal year 2016. The RSP Acquisition has been accounted for as a business combination and the results of RSP’s operations have been included in our consolidated financial statements since the Closing Date. Under the terms of the stock purchase agreement, RSP entered into an inventory purchase obligation with Renesas Electronics Corporation, or REL, to acquire Closing Date inventory held by REL. This inventory purchase obligation was settled in the three months ended December 31, 2014 for approximately $115 million.

Our estimate of the fair values of the acquired intangible assets at March 31, 2015 is preliminary and subject to change and is based on established and accepted valuation techniques performed by our third-party valuation specialists. Additional information, which existed as of the Closing Date but is yet unknown to us, may become known to us during the remainder of the measurement period, which will not exceed 12 months from the Closing Date. Changes to amounts recorded as assets or liabilities will be recorded as retrospective adjustments to the provisional amounts recognized as of the Closing Date and may result in a corresponding adjustment to goodwill. During the three months ended March 31, 2015, we made purchase price allocation adjustments, including a $9.7 million decrease to intangible assets, a $2.8 million decrease to deferred tax liability, a $0.5 million increase to current deferred tax asset, and a $0.3 million increase to goodwill.  The changes to intangible assets caused us to change our amortization expense retroactively to the previously reported numbers for the three months ended December 31, 2014. Specifically, we reduced the amortization to intangible assets recorded in selling, general, and administrative expenses by $1.5 million and increased the provision for income taxes by $0.5 million.  

11


 

The following table includes the revised provisional amounts recorded for the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

Cash

 

$

54,705

 

Short-term deposit

 

 

36,614

 

Accounts receivable

 

 

140,210

 

Current deferred tax assets

 

 

3,295

 

Inventory

 

 

6,296

 

Property and equipment

 

 

11,674

 

Acquired intangible assets

 

 

240,900

 

Other assets

 

 

4,002

 

Total identifiable assets acquired

 

 

497,696

 

Accounts payable

 

 

66,544

 

Income taxes payable

 

 

32,534

 

Deferred tax liabilities

 

 

56,751

 

Other accrued liabilities

 

 

28,032

 

Net identifiable assets acquired

 

 

313,835

 

Goodwill

 

 

153,715

 

Net assets acquired

 

$

467,550

 

 

Of the $240.9 million of acquired intangible assets, $143.6 million was allocated to developed technology and will be amortized over an estimated weighted average useful life of 5 years; $44.6 million was allocated to customer relationships and will be amortized over estimated useful lives of 2 to 3 years; $22.0 million was allocated to a supplier arrangement and will be amortized over an estimated useful life of less than 1 year; $10.3 million was allocated to backlog and will be amortized over an estimated useful life of less than 1 year; and $20.4 million was allocated to in-process research and development and will be amortized over an estimated useful life that will be determined at the date the underlying projects are deemed to be substantively complete which may occur as early as the fourth quarter of fiscal 2015. Developed technology consists of established small- and medium-sized display driver technology designed for and sold into the smartphone and tablet markets. We preliminarily estimated the fair value of the identified intangible assets using a discounted cash flow model for each of the underlying identified intangible assets. These fair value measurements were based on significant inputs not observable in the market and thus represent a Level 3 measurement. Key assumptions include the level and timing of expected future cash flows, conditions and demands specific to each intangible asset over its remaining useful life, and discount rates we believe to be consistent with the inherent risks associated with each type of asset, which range from 9% to 14%. The fair value of these intangible assets is primarily affected by the projected income and the anticipated timing of the projected income associated with each intangible asset coupled with the discount rates used to derive their estimated present values. We believe the level and timing of expected future cash flows appropriately reflects market participant assumptions.

The value of goodwill reflects the anticipated synergies of the combined operations and workforce of RSP as of the Closing Date.

None of the goodwill is expected to be deductible for income tax purposes. Prior to the RSP Acquisition, we did not have an existing relationship or transactions with RSP. The condensed consolidated financial statements include approximately $475.3 million of revenue from RSP from the Closing Date through March 31, 2015. Earnings contributed by RSP are not separately indentifiable.

The following unaudited pro forma financial information presents the combined results of operations for us and RSP as if the RSP Acquisition had occurred on June 30, 2013. The unaudited pro forma financial information has been prepared for comparative purposes only and does not purport to be indicative of the actual operating results that would have been recorded had the RSP Acquisition actually taken place on June 30, 2013, and should not be taken as indicative of future consolidated operating results. Additionally, the unaudited pro forma financial results do not include any anticipated synergies or other expected benefits from the acquisition.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(in thousands, except per share data)

 

Revenue

 

$

477,598

 

 

$

343,746

 

 

$

1,435,005

 

 

$

1,152,450

 

Net income/(loss)

 

 

33,449

 

 

 

(32,766

)

 

 

119,310

 

 

 

44,932

 

Net income/(loss) per share - diluted

 

 

0.87

 

 

 

(0.92

)

 

 

3.08

 

 

 

1.23

 

12


 

 

Pro forma adjustments used to arrive at pro forma net income for the three and nine months ended March 31, 2015 and March 31, 2014, were as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Buyer transaction costs

 

$

 

 

$

1,142

 

 

$

4,300

 

 

$

1,160

 

Amortization of debt issuance costs

 

 

 

 

 

(250

)

 

 

(250

)

 

 

(750

)

Interest expense

 

 

 

 

 

(1,222

)

 

 

(1,211

)

 

 

(3,700

)

Intangible amortization

 

 

3,080

 

 

 

(13,116

)

 

 

15,994

 

 

 

(65,048

)

Income tax adjustment

 

 

(1,109

)

 

 

4,722

 

 

 

(5,758

)

 

 

23,417

 

Total

 

$

1,971