syna-10q_20170325.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 25, 2017

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      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      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   □

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Number of shares of Common Stock outstanding at April 26, 2017: 34,304,923

 

 

 


SYNAPTICS INCORPORATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 25, 2017

TABLE OF CONTENTS

 

 

 

 

  

 

  

Page

Part I. Financial Information

  

 

 

 

 

 

   

 

Item 1.

   

Condensed Consolidated Financial Statements (Unaudited):

  

3

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets—March 31, 2017 and June 30, 2016

  

3

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Income—Three and Nine Months Ended March 31, 2017 and 2016

  

4

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Comprehensive Income—Three and Nine Months Ended March 31, 2017 and 2016

  

5

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows—Nine Months Ended March 31, 2017 and 2016

  

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

  

27

 

 

 

 

 

 

Item 4.

  

Controls and Procedures

  

27

 

 

Part II. Other Information

  

 

 

 

 

 

 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

28

 

 

 

 

 

 

Item 6.

  

Exhibits

  

29

 

 

Signatures

  

30

 

 

 


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,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

329.1

 

 

$

352.2

 

Accounts receivable, net of allowances of $4.0 and $3.7 at March 31, 2017 and

   June 30, 2016, respectively

 

 

246.6

 

 

 

252.6

 

Inventories

 

 

157.0

 

 

 

146.4

 

Prepaid expenses and other current assets

 

 

61.7

 

 

 

28.9

 

Total current assets

 

 

794.4

 

 

 

780.1

 

Property and equipment at cost, net of accumulated depreciation of $103.7

   and $87.3 at March 31, 2017 and June 30, 2016, respectively

 

 

113.2

 

 

 

112.7

 

Goodwill

 

 

206.8

 

 

 

206.8

 

Acquired intangibles, net

 

 

115.1

 

 

 

160.3

 

Non-current other assets

 

 

39.2

 

 

 

40.3

 

 

 

$

1,268.7

 

 

$

1,300.2

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

172.5

 

 

$

172.8

 

Accrued compensation

 

 

29.1

 

 

 

39.9

 

Income taxes payable

 

 

14.7

 

 

 

11.5

 

Acquisition-related liabilities

 

 

14.5

 

 

 

25.5

 

Other accrued liabilities

 

 

102.7

 

 

 

82.3

 

Current portion of long-term debt

 

 

15.0

 

 

 

18.8

 

Total current liabilities

 

 

348.5

 

 

 

350.8

 

Long-term debt, net of issuance costs

 

 

206.2

 

 

 

216.7

 

Acquisition-related liabilities

 

 

-

 

 

 

6.2

 

Deferred tax liabilities

 

 

0.9

 

 

 

9.0

 

Other long-term liabilities

 

 

14.0

 

 

 

12.5

 

Total  liabilities

 

 

569.6

 

 

 

595.2

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

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

   60,245,389 and 59,532,148 shares issued, and 34,303,913 and 35,212,141

   shares outstanding, at March 31, 2017 and June 30, 2016, respectively

 

 

0.1

 

 

 

0.1

 

Additional paid-in capital

 

 

981.5

 

 

 

928.6

 

Treasury stock: 25,941,476 and 24,320,007 common treasury shares at

   March 31, 2017 and June 30, 2016, respectively, at cost

 

 

(980.3

)

 

 

(892.3

)

Accumulated other comprehensive income

 

 

1.5

 

 

 

3.3

 

Retained earnings

 

 

696.3

 

 

 

665.3

 

Total stockholders' equity

 

 

699.1

 

 

 

705.0

 

 

 

$

1,268.7

 

 

$

1,300.2

 

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net revenue

 

$

444.2

 

 

$

402.5

 

 

$

1,291.7

 

 

$

1,343.0

 

Cost of revenue

 

 

309.5

 

 

 

258.1

 

 

 

894.9

 

 

 

869.6

 

Gross margin

 

 

134.7

 

 

 

144.4

 

 

 

396.8

 

 

 

473.4

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

71.6

 

 

 

73.9

 

 

 

218.5

 

 

 

233.0

 

Selling, general, and administrative

 

 

38.1

 

 

 

43.6

 

 

 

105.0

 

 

 

124.8

 

Acquired intangibles amortization

 

 

2.4

 

 

 

4.7

 

 

 

9.3

 

 

 

14.0

 

Change in contingent consideration

 

 

-

 

 

 

1.1

 

 

 

-

 

 

 

(0.5

)

Restructuring costs

 

 

0.3

 

 

 

-

 

 

 

7.3

 

 

 

1.9

 

Litigation settlement charge

 

 

10.0

 

 

 

-

 

 

 

10.0

 

 

 

-

 

Total operating expenses

 

 

122.4

 

 

 

123.3

 

 

 

350.1

 

 

 

373.2

 

Operating income

 

 

12.3

 

 

 

21.1

 

 

 

46.7

 

 

 

100.2

 

Interest and other income/(expense), net

 

 

(1.5

)

 

 

0.8

 

 

 

(1.8

)

 

 

(0.8

)

Income before provision for income taxes

 

 

10.8

 

 

 

21.9

 

 

 

44.9

 

 

 

99.4

 

Provision for income taxes

 

 

6.3

 

 

 

1.4

 

 

 

13.9

 

 

 

20.1

 

Net income

 

$

4.5

 

 

$

20.5

 

 

$

31.0

 

 

$

79.3

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

 

$

0.56

 

 

$

0.89

 

 

$

2.16

 

Diluted

 

$

0.13

 

 

$

0.54

 

 

$

0.87

 

 

$

2.09

 

Shares used in computing net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

34.8

 

 

 

36.8

 

 

 

34.9

 

 

 

36.7

 

Diluted

 

 

35.4

 

 

 

37.9

 

 

 

35.7

 

 

 

38.0

 

 

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

 

 

 

4

 


SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

4.5

 

 

$

20.5

 

 

$

31.0

 

 

$

79.3

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized net loss on investments

 

 

-

 

 

 

(0.1

)

 

 

(1.5

)

 

 

(1.1

)

Reclassification from accumulated other comprehensive

   income to interest income for accretion of

   non-current investments

 

 

-

 

 

 

(0.5

)

 

 

(0.3

)

 

 

(1.4

)

Net current period-other comprehensive loss

 

 

-

 

 

 

(0.6

)

 

 

(1.8

)

 

 

(2.5

)

Comprehensive income

 

$

4.5

 

 

$

19.9

 

 

$

29.2

 

 

$

76.8

 

 

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,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

31.0

 

 

$

79.3

 

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

 

 

 

 

 

 

 

 

Share-based compensation costs

 

 

46.3

 

 

 

40.9

 

Depreciation and amortization

 

 

25.0

 

 

 

23.4

 

Acquired intangibles amortization

 

 

45.2

 

 

 

55.6

 

Accretion and remeasurement of contingent consideration liability

 

 

-

 

 

 

(0.5

)

Deferred taxes

 

 

(11.7

)

 

 

(14.1

)

Impairment of property and equipment

 

 

-

 

 

 

2.4

 

Non-cash interest

 

 

(0.3

)

 

 

(1.4

)

Amortization of debt issuance costs

 

 

0.8

 

 

 

0.7

 

Impairment recovery on investments

 

 

(1.9

)

 

 

-

 

Foreign currency remeasurement loss

 

 

-

 

 

 

4.1

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

6.0

 

 

 

4.6

 

Inventories

 

 

(10.6

)

 

 

7.5

 

Prepaid expenses and other current assets

 

 

(25.6

)

 

 

1.1

 

Other assets

 

 

4.9

 

 

 

3.8

 

Accounts payable

 

 

1.6

 

 

 

(34.3

)

Accrued compensation

 

 

(10.6

)

 

 

(0.7

)

Acquisition-related liabilities

 

 

(16.8

)

 

 

(18.2

)

Income taxes payable

 

 

(0.2

)

 

 

(17.9

)

Other accrued liabilities

 

 

21.4

 

 

 

7.1

 

Net cash provided by operating activities

 

 

104.5

 

 

 

143.4

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from sales of investments

 

 

7.5

 

 

 

0.6

 

Purchase of intangible assets

 

 

-

 

 

 

(4.6

)

Purchases of property and equipment

 

 

(26.1

)

 

 

(19.7

)

Investment in direct financing lease

 

 

(15.8

)

 

 

-

 

Net cash used in investing activities

 

 

(34.4

)

 

 

(23.7

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payment of debt

 

 

(15.0

)

 

 

(7.6

)

Purchases of treasury stock

 

 

(88.0

)

 

 

(125.0

)

Proceeds from issuance of shares

 

 

14.7

 

 

 

22.5

 

Payment of debt issuance costs

 

 

-

 

 

 

(0.3

)

Excess tax benefit from share-based compensation

 

 

1.6

 

 

 

6.1

 

Payroll taxes for deferred stock and market stock units

 

 

(5.5

)

 

 

(13.5

)

Net cash used in financing activities

 

 

(92.2

)

 

 

(117.8

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(1.0

)

 

 

4.3

 

Net increase/(decrease) in cash and cash equivalents

 

 

(23.1

)

 

 

6.2

 

Cash and cash equivalents at beginning of period

 

 

352.2

 

 

 

399.9

 

Cash and cash equivalents at end of period

 

$

329.1

 

 

$

406.1

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

21.5

 

 

$

45.7

 

Cash refund on taxes

 

$

10.0

 

 

$

10.8

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment received but unpaid

 

$

2.5

 

 

$

4.8

 

 

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. 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 25, 2016.

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 2017 and 2016 years are 52-week periods ending on June 24, 2017 and June 25, 2016, respectively. The fiscal periods presented in this report were 13-week periods and 39-week periods for the three and nine months ended March 25, 2017 and March 26, 2016, respectively. For simplicity, the accompanying condensed 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 $0.4 million in the three and nine months ended March 31, 2017, and net losses of $3.3 million and $5.1 million in the three and nine months ended March 31, 2016, 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, 2017, we had no outstanding foreign currency forward contracts.  In the nine months ended March 31, 2017, and 2016 we recognized net gains of zero and $4.8 million, respectively, on the foreign currency forward contracts, which are recorded in selling, general, and administrative expenses in the condensed consolidated statements of income.

Recently Issued Accounting Pronouncements Not Yet Effective

In October 2016, the Financial Accounting Standards Board, or FASB, issued an accounting standard update, or ASU, on Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer

7

 


occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. This amendment should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. There are no new disclosure requirements. This ASU is effective for us beginning in the first quarter of fiscal 2019, and early adoption is permitted. While we continue to evaluate the impact of the adoption of this ASU on our condensed consolidated financial statements, we believe the adoption will result in incremental volatility in our GAAP tax rate in those periods when we enter into intercompany sales transactions of acquired technologies in connection with post-acquisition integration activities.

In August 2016, the FASB issued an ASU on Statement of Cash Flows-Classification of Certain Cash Receipts and Cash Payments. This ASU will be effective for us beginning in the first quarter of fiscal 2019 on a retrospective basis, and early adoption is permitted. We are evaluating the impact of this ASU on our condensed consolidated statements of cash flows.

In May 2014, the FASB issued an ASU on Revenue from Contracts with Customers. The ASU will supersede most of the existing revenue recognition guidance in U.S. GAAP when the new standard becomes effective, and requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. The ASU is effective for us in our fiscal year 2019, with early adoption permitted in the first quarter of fiscal 2018.  We are currently in the process of evaluating the impact of the adoption of this ASU on our condensed consolidated financial statements and considering additional disclosure requirements.  The new standard permits the use of either the retrospective or cumulative effect transition method.  We have not yet selected a transition method or determined the effect of the standard on our ongoing financial reporting.

In March 2016, the FASB issued an ASU for Compensation-Stock Compensation.  This update simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU will be effective for us beginning in the first quarter of fiscal 2018, with early adoption permitted.  While we continue to evaluate the effects of adoption of this ASU on our condensed consolidated financial statements, we believe it will impact our accounting for income taxes, specifically the timing of recognition of federal research credits.  

In February 2016, the FASB issued an ASU on Leases. This update requires organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. It also requires new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard will be effective for us beginning in the first quarter of our fiscal year 2020, with early adoption permitted. We are evaluating the effects of adoption of this ASU on our condensed consolidated financial statements.

In January 2016, the FASB issued an ASU on Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This ASU will be effective for us beginning in our first quarter of fiscal 2019, with early adoption permitted. We are evaluating the effects of the adoption of this ASU on our condensed consolidated financial statements.

In July 2015, the FASB issued an ASU that requires an entity to measure inventory at the lower of cost and net realizable value when the first-in, first-out, or average cost method is used. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The ASU will become effective for us in our first quarter of fiscal 2018, with early adoption permitted.  We are evaluating the effects of the adoption of this ASU on our condensed consolidated financial statements.

 

 

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 generally do not provide for price adjustments after purchase and revenue recognition 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.  When sales rebates and price allowances are applicable they are estimated, and recorded in the period the related revenue is recognized.

 

 

8

 


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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4.5

 

 

$

20.5

 

 

$

31.0

 

 

$

79.3

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares, basic

 

 

34.8

 

 

 

36.8

 

 

 

34.9

 

 

 

36.7

 

Effect of dilutive share-based awards

 

 

0.6

 

 

 

1.1

 

 

 

0.8

 

 

 

1.3

 

Shares, diluted

 

 

35.4

 

 

 

37.9

 

 

 

35.7

 

 

 

38.0

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

 

$

0.56

 

 

$

0.89

 

 

$

2.16

 

Diluted

 

$

0.13

 

 

$

0.54

 

 

$

0.87

 

 

$

2.09

 

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 over the period measured. 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 2,380,552 and 756,328 shares of common stock related to certain share-based awards that were outstanding during the three months ended March 31, 2017 and 2016, respectively, and 1,739,783 and 894,251 shares of common stock related to certain share-based awards that were outstanding during the nine months ended March 31, 2017 and 2016, 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 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,

 

 

 

2017

 

 

2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

311.0

 

 

$

-

 

 

$

-

 

 

$

319.1

 

 

$

-

 

 

$

-

 

Auction rate securities

 

 

-

 

 

 

-

 

 

 

1.5

 

 

 

-

 

 

 

-

 

 

 

8.6

 

Total available-for-sale securities

 

$

311.0

 

 

$

-

 

 

$

1.5

 

 

$

319.1

 

 

$

-

 

 

$

8.6

 

 

In our condensed consolidated balance sheets, as of March 31, 2017 and June 30, 2016, money market balances were included in cash and cash equivalents, and auction rate securities, or ARS investments, were included in non-current other assets.

The changes in fair value of our Level 3 financial assets as of March 31, 2017 were as follows:

 

Balance as of June 30, 2016

 

$

8.6

 

Net unrealized loss

 

 

(1.5

)

Impairment recovery on redeemed investments

 

 

1.9

 

Redemptions

 

 

(7.5

)

Balance as of March 31, 2017

 

$

1.5

 

There were no transfers in or out of our Level 1, 2, or 3 assets during the three and nine months ended March 31, 2017 and 2016.

9

 


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

We have accounted for our ARS investments as non-current as we are not able to reasonably determine when the ARS markets will recover or be restructured. 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.

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 $1.5 million with no maturity date and which are below investment grade.

The ARS investments we held as of March 31, 2017, 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

 

Preferred stock

 

$

5.0

 

 

$

(5.0

)

 

$

-

 

 

$

1.5

 

 

$

1.5

 

The ARS investments we held as of June 30, 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

 

$

7.5

 

 

$

(2.2

)

(1)

$

5.3

 

 

$

1.8

 

 

$

7.1

 

Preferred stock

 

 

5.0

 

 

 

(5.0

)

 

 

-

 

 

 

1.5

 

 

 

1.5

 

Total ARS

 

$

12.5

 

 

$

(7.2

)

 

$

5.3

 

 

$

3.3

 

 

$

8.6

 

 

(1)

Other-than-temporary impairment in retained earnings is partially offset by cumulative accretion of $4.4 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.

 

 

6. Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market and consisted of the following (in millions):

 

 

 

March 31,

 

 

June 30,

 

 

 

2017

 

 

2016

 

Raw materials

 

$

95.0

 

 

$

59.2

 

Finished goods

 

 

62.0

 

 

 

87.2

 

 

 

$

157.0

 

 

$

146.4

 

10

 


 

We record a write-down, if necessary, to reduce the carrying value of inventory to its net realizable value.  The effect of these write-downs is to establish a new cost basis in the related inventory, which we do not subsequently write up.  We also record a liability and charge to cost of revenue for estimated losses on inventory we are obligated to purchase from our contract manufacturers when such losses become probable from customer delays, order cancellations, or other factors.  

 

 

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, 2017 and June 30, 2016 (in millions):

 

 

 

Weighted Average

Life in Years

 

 

March 31, 2017

 

 

June 30, 2016

 

Display driver technology

 

 

5.3

 

 

$

164.0

 

 

$

164.0

 

Fingerprint authentication technology

 

 

4.3

 

 

 

63.5

 

 

 

75.6

 

Customer relationships

 

 

2.8

 

 

 

48.4

 

 

 

48.4

 

Licensed technology and other

 

 

5.0

 

 

 

1.3

 

 

 

1.3

 

Patents

 

 

7.7

 

 

 

4.7

 

 

 

4.8

 

Supplier arrangement

 

 

 

 

 

 

-

 

 

 

22.0

 

Acquired intangibles, gross

 

 

4.5

 

 

 

281.9

 

 

 

316.1

 

Accumulated amortization

 

 

 

 

 

 

(166.8

)

 

 

(155.8

)

Acquired intangibles, net

 

 

 

 

 

$

115.1

 

 

$

160.3

 

 

The total amortization expense for the acquired intangible assets was $14.0 million and $17.7 million for the three months ended March 31, 2017 and 2016, respectively, and $45.2 million and $55.6 million for the nine months ended March 31, 2017 and 2016, 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, 2017 (in millions):

 

Remainder of 2017

 

$

14.1

 

2018

 

 

48.6

 

2019

 

 

34.2

 

2020

 

 

10.6

 

2021

 

 

3.5

 

2022

 

 

3.5

 

Thereafter

 

 

0.6

 

Future amortization

 

$

115.1

 

 

 

8. Other Accrued Liabilities

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

 

 

 

March 31,

 

 

June 30,

 

 

 

2017

 

 

2016

 

Customer obligations

 

$

35.3

 

 

$

34.8

 

Inventory obligations

 

 

33.0

 

 

 

24.0

 

Warranty

 

 

3.7

 

 

 

3.5

 

Other

 

 

30.7

 

 

 

20.0

 

 

 

$

102.7

 

 

$

82.3

 

 

 

11

 


9. Indemnifications, Contingencies and Legal Proceedings

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 Sensors, Inc., or Validity, to secure our rights under the Agreement and Plan of Reorganization between us and Validity. Pursuant to the Agreement, we believe that we can offset costs, damages and settlements against the contingent consideration earnout balance for certain of the claims brought by Amkor.  Accordingly, we have withheld and reserved the remaining contingent consideration earnout balance of $8.7 million and have classified the reserve balance as a current acquisition-related liability in our condensed consolidated balance sheet. In April 2017, we agreed to settle this case with Amkor on undisclosed terms that include each party licensing and assigning certain intellectual property rights, and cash payments.  Settlement costs incurred in connection with this litigation have been recorded in our condensed consolidated financial statements for the three and nine month periods ended March 31, 2017.

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, 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 (approximately $5.8 million) of the Indemnification Holdback liability (see definition included under Contractual Obligations and Commercial Commitments in Management’s Discussion and Analysis contained elsewhere in this Report) and have classified the reserve balance as a current acquisition-related liability, as final settlement of the IIX complaint is expected to occur within the next twelve months.

 

 

10. Debt

On September 30, 2014, we entered into the Credit Agreement, with the lenders that are party thereto, or the Lenders, and Wells Fargo, as Administrative Agent for the Lenders.  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 party thereto, which amends the Credit Agreement, among us, the Lenders and the Administrative Agent.  On April 6, 2017, we entered into a Commitment Increase Agreement and Second Amendment, or the Incremental Amendment, to our existing 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 commitments pursuant to the terms of the First Amendment. Pursuant to the Incremental Amendment, we increased the maximum permitted principal amount of incremental loan commitments to $200 million, and utilized such increased amount to obtain additional revolving commitments under the Credit Agreement from each of the existing lenders in the aggregate principal amount of $200 million, such that after giving effect to the Incremental Amendment, the aggregate amount of the revolving commitments under the Credit Agreement became $450 million.  As of March 31, 2017, the outstanding balance of debt under the Credit Agreement and related amendments was $223.8 million.

12

 


 

The Credit Agreement provides for, among other things, (i) a revolving credit facility of up to $150 million, subsequently amended and increased to $450 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. 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. 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.

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 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 three months ended March 31, 2017, the interest rates on our borrowings ranged from approximately 1.85% to 2.86%.

The term loan facility requires repayment over five years with nineteen quarterly principal payments, which began in the three months ended 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, and the final principal payment of $90.0 million will be due on September 30, 2019. The revolving credit facility requires payment in full 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.     

Under the Credit Agreement, there are various restrictive 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 a restriction which places a limit 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, 2017, we were in compliance with the restrictive covenants.

The Incremental Amendment increased the maximum permitted leverage ratio during the last three years of the agreement from 2.0:1.0 to 2.50:1.00, with a further increase to 3.00:1.00 for the first four fiscal quarters ending after any acquisition having an aggregate consideration exceeding $150,000,000 and stepping down to 2.75:1.00 thereafter, and modified the negative covenants to permit up to $50,000,000 per fiscal quarter of accounts receivable financings.

 

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cost of revenue

 

$

0.6

 

 

$

0.5

 

 

$

1.7

 

 

$

1.3

 

Research and development

 

 

8.7

 

 

 

8.1

 

 

 

25.0

 

 

 

22.1

 

Selling, general, and administrative

 

 

6.8

 

 

 

6.4

 

 

 

19.6

 

 

 

17.5

 

Total

 

$

16.1

 

 

$

15.0

 

 

$

46.3

 

 

$

40.9

 

Income tax benefit on share-based compensation

 

$

4.1

 

 

$

4.0

 

 

$

12.1

 

 

$

10.8

 

13

 


Historically, we have issued new shares in connection with our share-based compensation plans, however, treasury shares are also now available for issuance. Any additional shares repurchased under our common stock repurchase program will be available for issuance under our share-based compensation plans.

Stock Options

Stock option activity, including stock options granted, exercised, and forfeited, weighted average exercise prices for stock options outstanding and exercisable, and the aggregate intrinsic value were as follows:

 

 

 

Stock

 

 

Weighted

 

 

Aggregate

 

 

 

Option

 

 

Average

 

 

Intrinsic

 

 

 

Awards

 

 

Exercise

 

 

Value

 

 

 

Outstanding

 

 

Price

 

 

(in millions)

 

Balance as of June 30, 2016

 

 

2,711,542

 

 

$

46.69

 

 

 

 

 

Granted

 

 

259,226