syna-10q_20160326.htm

Fincome segmentc 

 

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 26, 2016

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

For the transition period from              to             .

Commission file number 000-49602

 

SYNAPTICS INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

77-0118518

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1251 McKay Drive

San Jose, California 95131

(Address of principal executive offices) (Zip code)

(408) 904-1100

(Registrant’s telephone number, including area code)

 

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.:

 

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 28, 2016: 36,843,461

 

 

 


SYNAPTICS INCORPORATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 26, 2016

TABLE OF CONTENTS

 

 

 

 

  

 

  

Page

Part I. Financial Information

  

 

 

 

 

 

   

 

Item 1.

   

Condensed Consolidated Financial Statements (Unaudited):

  

3

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets—March 31, 2016 and June 30, 2015

  

3

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Income—Three and Nine Months Ended March 31, 2016 and 2015

  

4

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Comprehensive Income—Three and Nine Months Ended March 31, 2016 and 2015

  

5

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows—Nine Months Ended March 31, 2016 and 2015

  

6

 

 

 

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements

  

7

 

 

 

 

 

 

Item 2.

  

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

  

19

 

 

 

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

28

 

 

 

 

 

 

Item 4.

  

Controls and Procedures

  

28

 

 

Part II. Other Information

  

 

 

 

 

 

 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

29

 

 

 

 

 

 

Item 6.

  

Exhibits

  

30

 

 

Signatures

  

31

 

 

 


PART I—FINANCIAL INFORMATION

 

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except par value and share amounts)

(unaudited)

 

 

 

March 31,

 

 

June 30,

 

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

406.1

 

 

$

399.9

 

Accounts receivable, net of allowances of $3.5 and $2.9 at March 31, 2016 and

   June 30, 2015, respectively

 

 

320.0

 

 

 

324.6

 

Inventories

 

 

132.7

 

 

 

140.2

 

Prepaid expenses and other current assets

 

 

48.5

 

 

 

51.3

 

Total current assets

 

 

907.3

 

 

 

916.0

 

Property and equipment at cost, net of accumulated depreciation of $84.9

   and $67.4 at March 31, 2016 and June 30, 2015, respectively

 

 

113.9

 

 

 

123.4

 

Goodwill

 

 

206.8

 

 

 

206.8

 

Acquired intangibles, net

 

 

184.4

 

 

 

235.4

 

Non-current other assets

 

 

37.1

 

 

 

37.8

 

 

 

$

1,449.5

 

 

$

1,519.4

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

153.7

 

 

$

188.5

 

Accrued compensation

 

 

35.6

 

 

 

35.9

 

Income taxes payable

 

 

13.8

 

 

 

34.7

 

Acquisition-related liabilities

 

 

59.0

 

 

 

102.2

 

Other accrued liabilities

 

 

80.2

 

 

 

74.1

 

Current portion of long-term debt

 

 

15.0

 

 

 

11.3

 

Total current liabilities

 

 

357.3

 

 

 

446.7

 

Long-term debt, net of issuance costs

 

 

220.2

 

 

 

231.1

 

Deferred tax liabilities

 

 

22.0

 

 

 

33.9

 

Other long-term liabilities

 

 

49.2

 

 

 

14.6

 

Total  liabilities

 

 

648.7

 

 

 

726.3

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

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

   59,225,989 and 58,249,107 shares issued, and 36,837,777 and 37,529,608

   shares outstanding, at March 31, 2016 and June 30, 2015, respectively

 

 

0.1

 

 

 

0.1

 

Additional paid-in capital

 

 

899.7

 

 

 

843.8

 

Treasury stock: 22,388,212 and 20,719,499 common treasury shares at

   March 31, 2016 and June 30, 2015, respectively, at cost

 

 

(776.7

)

 

 

(651.7

)

Accumulated other comprehensive income

 

 

5.3

 

 

 

7.8

 

Retained earnings

 

 

672.4

 

 

 

593.1

 

Total stockholders' equity

 

 

800.8

 

 

 

793.1

 

 

 

$

1,449.5

 

 

$

1,519.4

 

 

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

 

 

 

3

 


SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net revenue

 

$

402.5

 

 

$

477.6

 

 

$

1,343.0

 

 

$

1,224.1

 

Cost of revenue

 

 

258.1

 

 

 

313.3

 

 

 

869.6

 

 

 

812.7

 

Gross margin

 

 

144.4

 

 

 

164.3

 

 

 

473.4

 

 

 

411.4

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

73.9

 

 

 

78.7

 

 

 

233.0

 

 

 

213.5

 

Selling, general, and administrative

 

 

43.6

 

 

 

35.8

 

 

 

124.8

 

 

 

88.5

 

Acquired intangibles amortization

 

 

4.7

 

 

 

4.6

 

 

 

14.0

 

 

 

9.5

 

Change in contingent consideration

 

 

1.1

 

 

 

(6.7

)

 

 

(0.5

)

 

 

(18.3

)

Restructuring costs

 

 

-

 

 

 

-

 

 

 

1.9

 

 

 

-

 

Total operating expenses

 

 

123.3

 

 

 

112.4

 

 

 

373.2

 

 

 

293.2

 

Operating income

 

 

21.1

 

 

 

51.9

 

 

 

100.2

 

 

 

118.2

 

Interest and other income/(expense), net

 

 

0.8

 

 

 

(1.0

)

 

 

(0.8

)

 

 

(1.1

)

Income before provision for income taxes

 

 

21.9

 

 

 

50.9

 

 

 

99.4

 

 

 

117.1

 

Provision for income taxes

 

 

1.4

 

 

 

19.4

 

 

 

20.1

 

 

 

38.0

 

Net income

 

$

20.5

 

 

$

31.5

 

 

$

79.3

 

 

$

79.1

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.56

 

 

$

0.86

 

 

$

2.16

 

 

$

2.15

 

Diluted

 

$

0.54

 

 

$

0.82

 

 

$

2.09

 

 

$

2.04

 

Shares used in computing net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

36.8

 

 

 

36.7

 

 

 

36.7

 

 

 

36.8

 

Diluted

 

 

37.9

 

 

 

38.5

 

 

 

38.0

 

 

 

38.8

 

 

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

 

 

 

4

 


SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

20.5

 

 

$

31.5

 

 

$

79.3

 

 

$

79.1

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized net loss on investments

 

 

(0.1

)

 

 

0.3

 

 

 

(1.1

)

 

 

0.6

 

Reclassification from accumulated other comprehensive

   income to interest income for accretion of

   non-current investments

 

 

(0.5

)

 

 

(0.4

)

 

 

(1.4

)

 

 

(1.1

)

Net current-period other comprehensive income

 

 

(0.6

)

 

 

(0.1

)

 

 

(2.5

)

 

 

(0.5

)

Comprehensive income

 

$

19.9

 

 

$

31.4

 

 

$

76.8

 

 

$

78.6

 

 

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

 

 

 

5

 


SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

79.3

 

 

$

79.1

 

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

 

 

 

 

 

 

 

 

Share-based  compensation costs

 

 

40.9

 

 

 

31.8

 

Depreciation and amortization

 

 

23.4

 

 

 

17.3

 

Acquired intangibles amortization

 

 

55.6

 

 

 

68.7

 

Accretion and remeasurement of contingent consideration liability

 

 

(0.5

)

 

 

(18.3

)

Deferred taxes

 

 

(14.1

)

 

 

(13.6

)

Impairment recovery on investments

 

 

-

 

 

 

(0.2

)

Impairment of  property and equipment

 

 

2.4

 

 

 

-

 

Non-cash interest

 

 

(1.4

)

 

 

(1.0

)

Amortization of debt issuance costs

 

 

0.7

 

 

 

0.5

 

Foreign currency remeasurement (gain)/loss

 

 

4.1

 

 

 

(7.4

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

4.6

 

 

 

5.8

 

Inventories

 

 

7.5

 

 

 

(63.6

)

Prepaid expenses and other current assets

 

 

1.1

 

 

 

30.9

 

Other assets

 

 

3.8

 

 

 

8.6

 

Accounts payable

 

 

(34.3

)

 

 

26.4

 

Accrued compensation

 

 

(0.7

)

 

 

(1.8

)

Acquisition-related liabilities

 

 

(18.2

)

 

 

-

 

Income taxes payable

 

 

(17.9

)

 

 

(7.1

)

Other accrued liabilities

 

 

7.1

 

 

 

16.4

 

Net cash provided by operating activities

 

 

143.4

 

 

 

172.5

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from sales of short-term investments

 

 

0.6

 

 

 

-

 

Proceeds from sales of non-current investments

 

 

-

 

 

 

4.9

 

Acquisition of business, net of cash acquired

 

 

-

 

 

 

(294.3

)

Purchase of intangible assets

 

 

(4.6

)

 

 

-

 

Purchases of property and equipment

 

 

(19.7

)

 

 

(40.8

)

Net cash used in investing activities

 

 

(23.7

)

 

 

(330.2

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payment of acquisition-related liabilities

 

 

-

 

 

 

(63.8

)

Payment of debt

 

 

(7.6

)

 

 

(1.9

)

Purchases of treasury stock

 

 

(125.0

)

 

 

(110.6

)

Proceeds from issuance of shares

 

 

22.5

 

 

 

24.5

 

Proceeds from issuance of long-term debt

 

 

-

 

 

 

245.4

 

Payment of debt issuance costs

 

 

(0.3

)

 

 

(0.4

)

Excess tax benefit from share-based compensation

 

 

6.1

 

 

 

13.2

 

Payroll taxes for deferred stock and market stock units

 

 

(13.5

)

 

 

(12.0

)

Net cash provided from/(used in) financing activities

 

 

(117.8

)

 

 

94.4

 

Effect of exchange rate changes on cash and cash equivalents

 

 

4.3

 

 

 

(3.3

)

Net increase/(decrease) in cash and cash equivalents

 

 

6.2

 

 

 

(66.6

)

Cash and cash equivalents at beginning of period

 

 

399.9

 

 

 

447.2

 

Cash and cash equivalents at end of period

 

$

406.1

 

 

$

380.6

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for  taxes

 

$

45.7

 

 

$

41.9

 

Cash refund on taxes

 

$

10.8

 

 

$

-

 

Non-cash investing  and financing activities:

 

 

 

 

 

 

 

 

Property and equipment received but unpaid

 

$

4.8

 

 

$

4.8

 

Common stock issued pursuant to acquisition

 

$

-

 

 

$

21.5

 

 

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 27, 2015.

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 2016 and 2015 years are 52-week periods ending on June 25, 2016 and June 27, 2015, respectively. The quarterly fiscal periods presented in this report were 13-week periods and 39-week periods for the three and nine months ended March 26, 2016 and March 28, 2015, 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, accrued liabilities, share-based compensation costs, provision for income taxes, deferred income tax asset valuation allowances, uncertain tax positions, goodwill, intangible assets, investments, contingent consideration liability and loss contingencies. We base our estimates on historical experience, applicable laws and regulations, and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Foreign Currency Transactions and Foreign Exchange Contracts

The U.S. dollar is our functional and reporting currency.  We remeasure our monetary assets and liabilities not denominated in the functional currency into U.S. dollar equivalents at the rate of exchange in effect on the balance sheet date.  We measure and record non-monetary balance sheet accounts at the historical rate in effect at the date of transaction.  We remeasure foreign currency expenses at the weighted average exchange rate in the month that the transaction occurred.  Our foreign currency transactions and remeasurement gains and losses are included in selling, general, and administrative expenses in the condensed consolidated statements of income, and resulted in net losses of $3.3 million and $5.1 million in the three and nine months ended March 31, 2016, respectively, and resulted in a net loss of $0.8 million and a net gain of $14.1 million in the three and nine months ended March 31, 2015, respectively.

We 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 fiscal year 2015, we entered into foreign currency forward contracts to purchase Japanese yen, using U.S. dollars. As of March 31, 2016, we had no outstanding foreign currency forward contracts.  In the three and nine months ended March 31, 2016, we recognized net gains of $3.5 million and $4.8 million, respectively.

 

 

7

 


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, 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. Our sales to distributors are made under agreements that do not provide for price adjustments after purchase and provide for only limited return rights under product warranty. Revenue on these sales is recognized in the same manner as sales to our non-distributor customers.

 

 

3. Net Income Per Share

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

20.5

 

 

$

31.5

 

 

$

79.3

 

 

$

79.1

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares, basic

 

 

36.8

 

 

 

36.7

 

 

 

36.7

 

 

 

36.8

 

Effect of dilutive share-based awards

 

 

1.1

 

 

 

1.8

 

 

 

1.3

 

 

 

2.0

 

Shares, diluted

 

 

37.9

 

 

 

38.5

 

 

 

38.0

 

 

 

38.8

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.56

 

 

$

0.86

 

 

$

2.16

 

 

$

2.15

 

Diluted

 

$

0.54

 

 

$

0.82

 

 

$

2.09

 

 

$

2.04

 

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 market stock units, or MSUs.

Dilutive net income per share amounts do not include the potential weighted average effect of 756,328 and 380,506 shares of common stock related to certain share-based awards that were outstanding during the three months ended March 31, 2016 and 2015, respectively, and 894,251 and 370,296 shares of common stock related to certain share-based awards that were outstanding during the nine months ended March 31, 2016 and 2015, 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

Financial assets and liabilities, measured at fair value on a recurring basis by level within the fair value hierarchy, consisted of the following (in millions):

 

 

 

March 31,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

313.3

 

 

$

-

 

 

$

-

 

 

$

376.3

 

 

$

-

 

 

$

-

 

Auction rate securities

 

 

-

 

 

 

-

 

 

 

14.1

 

 

 

-

 

 

 

-

 

 

 

15.8

 

Total available-for-sale securities

 

$

313.3

 

 

$

-

 

 

$

14.1

 

 

$

376.3

 

 

$

-

 

 

$

15.8

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration liabilities recorded for

   business combinations

 

$

-

 

 

$

-

 

 

$

25.5

 

 

$

-

 

 

$

-

 

 

$

44.2

 

Foreign currency contract liabilities

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1.3

 

 

$

-

 

 

8

 


In our condensed consolidated balance sheets as of March 31, 2016 and June 30, 2015, money market balances were included in cash and cash equivalents, and auction rate securities, or ARS investments, were included in non-current other assets except $600,000 of the ARS investments were included in prepaid expenses and other current assets as of June 30, 2015.

The contingent consideration liability recorded for business combinations was included in other long-term liabilities as of March 31, 2016 and acquisition-related liabilities as of June 30, 2015, respectively.

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 and liabilities in markets that are not active.  Key inputs for the foreign currency forward contracts are spot rates and yield curves for the respective currencies.  There were no outstanding foreign currency contracts as of March 31, 2016.  The foreign currency contracts were included in other accrued liabilities as of June 30, 2015.

Changes in fair value of our Level 3 financial assets as of March 31, 2016 were as follows (in millions):

 

Balance as of June 30, 2015

 

$

15.8

 

Net loss

 

 

(1.1

)

Redemptions

 

 

(0.6

)

Balance as of March 31, 2016

 

$

14.1

 

 

Changes in fair value of our Level 3 contingent consideration liabilities as of March 31, 2016 were as follows (in millions):

 

Balance as of June 30, 2015

 

$

44.2

 

Cash settlement of contingent consideration liability

 

 

(18.2

)

Accretion and remeasurement

 

 

(0.5

)

Balance as of March 31, 2016

 

$

25.5

 

 

In connection with our acquisition of Validity Sensors, Inc., or Validity, we entered into a contingent consideration arrangement. As of March 31, 2016, the balance represents amounts we have not paid and have retained, subject to resolution of the Amkor Technology legal dispute (see Legal Proceedings under Note 9).

In connection with our acquisition of Pacinian Corporation, or Pacinian, we entered into a contingent consideration arrangement. As of March 31, 2016, 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. 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, 2016 and 2015.

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. Auction Rate Securities

Our ARS investments, which are primarily included in non-current other assets in the condensed consolidated balance sheets, have failed to settle in auctions beginning in 2007.  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. During the nine months ended March 31, 2016, $0.6 million of our ARS investments were redeemed at par value.

9

 


As there are currently no active markets for our various failed ARS investments, we have estimated the fair value of these investments as of March 31, 2016 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;

 

·

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 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 fluctuate from period to period depending on future market conditions.

We have ARS investments with a fair value of $12.6 million maturing in fiscal year 2018 and $1.5 million fair value with no maturity date. As of March 31, 2016 all of our ARS investments are below investment grade.

The various types of ARS investments we held as of March 31, 2016, 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 millions):

 

 

 

Original

Cost Basis

 

 

Other-than-

temporary

Impairment

in Retained

Earnings

 

 

New Cost

Basis

 

 

Unrealized

Gain

 

 

Fair Value

 

Credit linked notes

 

$

13.5

 

 

$

(4.7

)

(1)

$

8.8

 

 

$

3.8

 

 

$

12.6

 

Preferred stock

 

 

5.0

 

 

 

(5.0

)

 

 

-

 

 

 

1.5

 

 

 

1.5

 

Total ARS

 

$

18.5

 

 

$

(9.7

)

 

$

8.8

 

 

$

5.3

 

 

$

14.1

 

 

(1)

Other-than-temporary impairment in retained earnings is partially offset by cumulative accretion of $4.1 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, 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 millions):

 

 

 

Original

Cost Basis

 

 

Other-than-

temporary

Impairment

in Retained

Earnings

 

 

New Cost

Basis

 

 

Unrealized

Gain

 

 

Fair Value

 

Credit linked notes

 

$

13.5

 

 

$

(6.1

)

(1)

$

7.4

 

 

$

5.0

 

 

$

12.4

 

Preferred stock

 

 

5.0

 

 

 

(5.0

)

 

 

-

 

 

 

2.8

 

 

 

2.8

 

Municipals

 

 

0.6

 

 

 

(0.1

)

 

 

0.5

 

 

 

0.1

 

 

 

0.6

 

Total ARS

 

$

19.1

 

 

$

(11.2

)

 

$

7.9

 

 

$

7.9

 

 

$

15.8

 

 

(1)

Other-than-temporary impairment in retained earnings is partially offset by cumulative accretion of $2.7 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.

10

 


 

All of our ARS investments are accounted for as non-current as the maturity dates are more than 12 months from the balance sheet date.  We do not intend to sell the ARS investments before the recovery of the amortized cost basis 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 millions):

 

 

 

March 31,

 

 

June 30,

 

 

 

2016

 

 

2015

 

Raw materials

 

$

52.7

 

 

$

75.5

 

Finished goods

 

 

80.0

 

 

 

64.7

 

 

 

$

132.7

 

 

$

140.2

 

 

We record a liability for estimated probable losses on inventory purchase commitments.

 

 

7. Acquired Intangibles

The following table summarizes the life, the gross carrying value and the related accumulated amortization of our acquired intangible assets as of March 31, 2016 and June 30, 2015 (in millions):

 

 

 

Weighted Average

Life in Years

 

 

March 31, 2016

 

 

June 30, 2015

 

Display driver technology

 

 

5.3

 

 

$

164.0

 

 

$

164.0

 

Fingerprint authentication technology

 

 

3.6

 

 

 

75.6

 

 

 

75.6

 

ThinTouch technology

 

 

7.0

 

 

 

8.9

 

 

 

8.9

 

Customer relationships

 

 

2.8

 

 

 

48.4

 

 

 

48.4

 

Licensed technology and other

 

 

5.0

 

 

 

1.3

 

 

 

1.3

 

Backlog

 

-

 

 

 

-

 

 

 

10.3

 

Patents

 

 

7.6

 

 

 

4.7

 

 

 

0.1

 

Supplier arrangement

 

 

1.8

 

 

 

22.0

 

 

 

22.0

 

Acquired intangibles, gross

 

 

4.3

 

 

 

324.9

 

 

 

330.6

 

Accumulated amortization

 

 

 

 

 

 

(140.5

)

 

 

(95.2

)

Acquired intangibles, net

 

 

 

 

 

$

184.4

 

 

$

235.4

 

 

The total amortization expense for the acquired intangible assets was $17.7 million and $20.8 million for the three months ended March 31, 2016 and 2015, respectively, and $55.6 million and $68.7 million for the nine months ended March 31, 2016 and 2015, respectively.  Amortization expense was included in our condensed consolidated statements of income in cost of revenue and acquired intangibles amortization.

The following table presents expected annual fiscal year aggregate amortization expense as of March 31, 2016 (in millions):

 

Remainder of 2016

 

$

17.7

 

2017

 

 

61.2

 

2018

 

 

49.8

 

2019

 

 

35.4

 

2020

 

 

11.9

 

2021

 

 

3.9

 

Thereafter

 

 

4.3

 

To be determined

 

 

0.2

 

Future amortization

 

$

184.4

 

11

 


 

 

8. Other Accrued Liabilities

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

 

 

 

March 31,

 

 

June 30,

 

 

 

2016

 

 

2015

 

Customer obligations

 

$

32.1

 

 

$

36.9

 

Inventory obligations

 

 

23.3

 

 

 

17.2

 

Warranty

 

 

3.4

 

 

 

2.8

 

Other

 

 

21.4

 

 

 

17.2

 

 

 

$

80.2

 

 

$

74.1

 

 

 

9. Product Warranties, Indemnifications, Contingencies and Legal Proceedings

Product Warranties

We generally warrant our products for a period of 12 months from the date of delivery and accrue estimated probable product warranty costs as a cost of revenue at the time we recognize revenue. Factors that affect our warranty liability include historical and anticipated rates of warranty claims, materials usage, rework, 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 agreements, we are obligated to indemnify the counterparty against third party claims alleging infringement of certain intellectual property rights by us. We have also entered into indemnification agreements with our officers and directors. Maximum potential future payments 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 condensed consolidated financial statements for such indemnification obligations.

Contingencies

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

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

Legal Proceedings

In October 2015, Amkor Technology, or Amkor, filed a complaint against us alleging infringement of intellectual property rights and various other claims. In November 2015, we filed an indemnification claim against the former stockholders and option holders of Validity to secure our rights under the Agreement and Plan of Reorganization between us and Validity. Pursuant to the Agreement, we can offset costs, damages and settlements against the contingent consideration earnout balance for certain of the claims brought by Amkor.  Accordingly, we have reserved the remaining contingent consideration earnout balance of $25.5 million and have classified the reserve balance as a non-current liability, as final settlement of the Amkor complaint is not expected to occur within the next twelve months. 

In September 2015, IIX Inc., or IIX, filed a complaint against us demanding payment of certain fees and costs plus interest allegedly due to IIX under a memorandum of understanding, or MOU, entered into between IIX and Renesas SP Drivers, Inc., or RSP (which we acquired on October 1, 2014), as well as litigation costs. In September 2015, we tendered a claim for indemnification from Renesas Electronics Corporation, or Renesas, on the basis that the IIX claim arises from a breach of Renesas’ obligations under the Stock Purchase Agreement that we executed with Renesas, among others, in June 2014.  Accordingly, we have retained ¥648 million of the indemnification holdback liability and have classified the reserve balance as a non-current liability, as final settlement of the IIX complaint is not expected to occur within the next twelve months.

12

 


We are involved in several other non-material litigation activities.  We have expensed all legal fees incurred to date in connection with our legal activities.

 

 

10. Debt

We have a credit agreement, or the Credit Agreement, in place with the lenders party thereto, or the Lenders, and Wells Fargo Bank, National Association, or the Administrative Agent, as administrative agent for the Lenders.

The Credit Agreement provides for, among other things, (i) a revolving credit facility of up to $250 million, which includes a $20 million sublimit for letters of credit and a $20 million sublimit for swingline loans, and (ii) a term loan facility in an amount of $150 million. Under the terms of the Credit Agreement, we may, subject to the satisfaction of certain conditions, request increases in the revolving credit facility commitments and additional term loan commitments in an aggregate principal amount of up to $100 million to the extent existing or new lenders agree to provide such increased or additional commitments, as applicable. At the initial closing under the Credit Agreement, we borrowed $150 million under the term loan facility and $100 million under the revolving credit facility to finance a portion of the RSP acquisition purchase price. Initial debt issuance costs were approximately $5.0 million, which are being amortized over 60 months.

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

On October 20, 2015, we entered into a Commitment Increase Agreement and First Amendment to Credit Agreement, or the First Amendment, with the Administrative Agent and each of the Lenders, which amends the Credit Agreement.

Pursuant to the First Amendment, we exercised our right under the Credit Agreement to request a $100 million increase to the aggregate revolving credit commitment thereunder, for total aggregate revolving credit commitments of $250 million and the Lenders under the Credit Agreement agreed to provide such increased revolving credit.

The First Amendment also amends the Credit Agreement by (i) reducing commitment fee rates set forth in the definition of Applicable Margin; (ii) providing that we may, from time to time, request incremental increases from the Lenders in the aggregate revolving and term commitments by an amount not exceeding $100 million, such increases to be in addition to the increase provided by the First Amendment; and (iii) making certain other administrative changes, all as set forth in the First Amendment.

The revolving credit facility and term loans under the Credit Agreement bear interest at our election of a Base Rate plus an applicable margin or LIBOR plus an applicable margin. Swingline loans bear interest at a Base Rate plus an applicable margin. The Base Rate is a floating rate that is the greater of the Prime Rate, the Federal Funds Rate plus 50 basis points, or LIBOR plus 100 basis points. The applicable margin is based on a sliding scale which ranges from zero to 100 basis points for Base Rate loans and 100 basis points to 200 basis points for LIBOR loans.  During the nine months ended March 31, 2016, the interest rates on our borrowings ranged from approximately 1.50% to 1.95%.

The term loan facility requires repayment over five years with nineteen quarterly principal payments which began in the three months ending March 31, 2015.  Each of the first four quarterly principal payments were $1.9 million, each of the following quarterly principal payments are $3.8 million, with the final principal payment of $90.0 million due on September 30, 2019. The revolving credit facility requires payment in full at the end of five years on September 30, 2019. We are also required to pay a commitment fee for any unused portion of the revolving credit facility, which ranges from 0.25% to 0.45% per annum. Interest on the term loan facility and revolving credit facility is payable quarterly.  As of March 31, 2016, the outstanding balance of the debt owed under the Credit Agreement was $238.8 million.    

Borrowings under the Credit Agreement will continue to bear interest at a variable interest rate based on LIBOR or a Base Rate, in each case plus the Applicable Margin.  The Applicable Margin is based on our consolidated total leverage ratio pursuant to a pricing grid set forth in the Credit Agreement.  


13

 


Under the Credit Agreement, there are restrictive operating covenants, including three financial covenants which limit the consolidated total leverage ratio, or leverage ratio, the consolidated interest coverage ratio, or interest coverage ratio, and places a restriction on the amount of capital expenditures that may be made in any fiscal year. The leverage ratio is the ratio of debt as of the measurement date to earnings before interest, taxes, depreciation and amortization, or EBITDA, for the four consecutive quarters ending with the quarter of measurement. The leverage ratio must not exceed 2.50 to 1.0 during the first two years of the agreement, and 2.0 to 1.0 during the last three years of the agreement. The interest coverage ratio is EBITDA to interest expense for the four consecutive quarters ending with the quarter of measurement. The interest coverage ratio must not be less than 3.50 to 1.0 during the term of the Credit Agreement.  As of March 31, 2016, we were in compliance with the restrictive operating covenants.

 

 

11. Share-Based Compensation

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cost of revenue

 

$

0.5

 

 

$