syna-10q_20180331.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 31, 2018

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 27, 2018: 34,614,153

 

 

 


SYNAPTICS INCORPORATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2018

TABLE OF CONTENTS

 

 

 

 

  

 

  

Page

Part I. Financial Information

  

 

 

 

 

 

   

 

Item 1.

   

Condensed Consolidated Financial Statements (Unaudited):

  

3

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets—March 31, 2018 and June 30, 2017

  

3

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Operations—Three and Nine Months Ended March 31, 2018 and 2017

  

4

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Comprehensive Income/(Loss)—Three and Nine Months Ended March 31, 2018 and 2017

  

5

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows—Nine Months Ended March 31, 2018 and 2017

  

6

 

 

 

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements

  

7

 

 

 

 

 

 

Item 2.

  

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

  

24

 

 

 

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

34

 

 

 

 

 

 

Item 4.

  

Controls and Procedures

  

34

 

 

Part II. Other Information

  

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

35

 

 

 

 

 

 

 

 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

35

 

 

 

 

 

 

Item 6.

  

Exhibits

  

36

 

 

 

 

 

 

 

Signatures

  

37

 

 

 


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,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

283.4

 

 

$

367.8

 

Accounts receivable, net of allowances of $2.6 at March 31, 2018 and

   June 30, 2017

 

 

258.2

 

 

 

255.2

 

Inventories

 

 

108.5

 

 

 

131.4

 

Prepaid expenses and other current assets

 

 

16.0

 

 

 

37.6

 

Total current assets

 

 

666.1

 

 

 

792.0

 

Property and equipment at cost, net of accumulated depreciation of $129.1

   and $106.8 at March 31, 2018 and June 30, 2017, respectively

 

 

118.7

 

 

 

113.8

 

Goodwill

 

 

404.2

 

 

 

206.8

 

Acquired intangibles, net

 

 

209.4

 

 

 

101.0

 

Non-current other assets

 

 

45.3

 

 

 

53.1

 

 

 

$

1,443.7

 

 

$

1,266.7

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

132.1

 

 

$

135.8

 

Accrued compensation

 

 

18.2

 

 

 

31.9

 

Income taxes payable

 

 

16.7

 

 

 

17.2

 

Acquisition-related liabilities

 

 

8.7

 

 

 

8.7

 

Other accrued liabilities

 

 

91.2

 

 

 

101.8

 

Current portion of long-term debt

 

 

-

 

 

 

15.0

 

Total current liabilities

 

 

266.9

 

 

 

310.4

 

Long-term debt, net of issuance costs

 

 

-

 

 

 

202.0

 

Convertible notes, net

 

 

446.5

 

 

 

-

 

Deferred tax liabilities

 

 

6.1

 

 

 

-

 

Other long-term liabilities

 

 

28.3

 

 

 

14.1

 

Total liabilities

 

 

747.8

 

 

 

526.5

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

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

   62,234,111 and 60,579,911 shares issued, and 34,594,235 and 34,638,435 shares

   outstanding, at March 31, 2018 and June 30, 2017, respectively

 

 

0.1

 

 

 

0.1

 

Additional paid-in capital

 

 

1,160.3

 

 

 

1,004.8

 

Treasury stock:  27,639,876 and 25,941,476 common treasury shares at

   March 31, 2018 and June 30, 2017, respectively, at cost

 

 

(1,073.9

)

 

 

(980.3

)

Accumulated other comprehensive income

 

 

1.5

 

 

 

1.5

 

Retained earnings

 

 

607.9

 

 

 

714.1

 

Total stockholders' equity

 

 

695.9

 

 

 

740.2

 

 

 

$

1,443.7

 

 

$

1,266.7

 

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

 

 

 

3

 


SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net revenue

 

$

394.0

 

 

$

444.2

 

 

$

1,241.8

 

 

$

1,291.7

 

Cost of revenue

 

 

271.1

 

 

 

309.5

 

 

 

889.3

 

 

 

894.9

 

Gross margin

 

 

122.9

 

 

 

134.7

 

 

 

352.5

 

 

 

396.8

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

93.7

 

 

 

71.6

 

 

 

273.0

 

 

 

218.5

 

Selling, general, and administrative

 

 

37.9

 

 

 

38.1

 

 

 

115.6

 

 

 

105.0

 

Acquired intangibles amortization

 

 

1.4

 

 

 

2.4

 

 

 

8.5

 

 

 

9.3

 

Restructuring

 

 

2.2

 

 

 

0.3

 

 

 

8.6

 

 

 

7.3

 

Litigation settlement charge

 

 

-

 

 

 

10.0

 

 

 

-

 

 

 

10.0

 

Total operating expenses

 

 

135.2

 

 

 

122.4

 

 

 

405.7

 

 

 

350.1

 

Operating income/(loss)

 

 

(12.3

)

 

 

12.3

 

 

 

(53.2

)

 

 

46.7

 

Interest and other expense, net

 

 

(4.7

)

 

 

(1.5

)

 

 

(15.4

)

 

 

(1.8

)

Income/(loss) before provision/(benefit) for income taxes and equity investment loss

 

 

(17.0

)

 

 

10.8

 

 

 

(68.6

)

 

 

44.9

 

Provision/(benefit) for income taxes

 

 

(3.9

)

 

 

6.3

 

 

 

52.6

 

 

 

13.9

 

Equity investment loss

 

 

(0.6

)

 

 

-

 

 

 

(1.4

)

 

 

-

 

Net income/(loss)

 

$

(13.7

)

 

$

4.5

 

 

$

(122.6

)

 

$

31.0

 

Net income/(loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.40

)

 

$

0.13

 

 

$

(3.61

)

 

$

0.89

 

Diluted

 

$

(0.40

)

 

$

0.13

 

 

$

(3.61

)

 

$

0.87

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

34.5

 

 

 

34.8

 

 

 

34.0

 

 

 

34.9

 

Diluted

 

 

34.5

 

 

 

35.4

 

 

 

34.0

 

 

 

35.7

 

 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income/(loss)

 

$

(13.7

)

 

$

4.5

 

 

$

(122.6

)

 

$

31.0

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized net loss on investments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1.5

)

Reclassification from accumulated other comprehensive

   income to interest income for accretion of

   non-current investments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(0.3

)

Net current period-other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1.8

)

Comprehensive income/(loss)

 

$

(13.7

)

 

$

4.5

 

 

$

(122.6

)

 

$

29.2

 

 

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,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

(122.6

)

 

$

31.0

 

Adjustments to reconcile net income/(loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Share-based compensation costs

 

 

53.1

 

 

 

46.3

 

Depreciation and amortization

 

 

28.6

 

 

 

25.0

 

Acquired intangibles amortization

 

 

62.0

 

 

 

45.2

 

Deferred taxes

 

 

16.8

 

 

 

(11.7

)

Non-cash interest

 

 

-

 

 

 

(0.3

)

Amortization of convertible debt discount and issuance costs

 

 

12.7

 

 

 

-

 

Amortization of debt issuance costs

 

 

1.5

 

 

 

0.8

 

Impairment recovery on investments

 

 

-

 

 

 

(1.9

)

Equity investment loss

 

 

1.4

 

 

 

-

 

Foreign currency remeasurement loss

 

 

0.1

 

 

 

-

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

8.2

 

 

 

6.0

 

Inventories

 

 

102.2

 

 

 

(10.6

)

Prepaid expenses and other current assets

 

 

20.9

 

 

 

(25.6

)

Other assets

 

 

(7.2

)

 

 

4.9

 

Accounts payable

 

 

(15.9

)

 

 

1.6

 

Accrued compensation

 

 

(15.4

)

 

 

(10.6

)

Acquisition-related liabilities

 

 

-

 

 

 

(16.8

)

Income taxes payable

 

 

1.8

 

 

 

(0.2

)

Other accrued liabilities

 

 

(11.1

)

 

 

21.4

 

Net cash provided by operating activities

 

 

137.1

 

 

 

104.5

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash and cash equivalents acquired

 

 

(396.4

)

 

 

-

 

Proceeds from sales of investments

 

 

-

 

 

 

7.5

 

Purchases of property and equipment

 

 

(27.5

)

 

 

(26.1

)

Purchase of intangible assets

 

 

(7.7

)

 

 

-

 

Investment in direct financing lease

 

 

-

 

 

 

(15.8

)

Net cash used in investing activities

 

 

(431.6

)

 

 

(34.4

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible debt, net of issuance costs

 

 

514.5

 

 

 

-

 

Payment of debt

 

 

(220.0

)

 

 

(15.0

)

Purchases of treasury stock

 

 

(93.6

)

 

 

(88.0

)

Proceeds from issuance of shares

 

 

15.0

 

 

 

14.7

 

Payment of debt issuance costs

 

 

(1.1

)

 

 

-

 

Excess tax benefit from share-based compensation

 

 

-

 

 

 

1.6

 

Payroll taxes for deferred stock and market stock units

 

 

(4.8

)

 

 

(5.5

)

Net cash provided by/(used in) financing activities

 

 

210.0

 

 

 

(92.2

)

Effect of exchange rate changes on cash and cash equivalents

 

 

0.1

 

 

 

(1.0

)

Net decrease in cash and cash equivalents

 

 

(84.4

)

 

 

(23.1

)

Cash and cash equivalents at beginning of period

 

 

367.8

 

 

 

352.2

 

Cash and cash equivalents at end of period

 

$

283.4

 

 

$

329.1

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

26.0

 

 

$

21.5

 

Cash refund on taxes

 

$

1.0

 

 

$

10.0

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment in current liabilities

 

$

3.8

 

 

$

2.5

 

Common stock issued pursuant to acquisition

 

$

39.1

 

 

$

-

 

 

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 24, 2017.

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 2018 is a 53-week period ending June 30, 2018, and our fiscal 2017 was a 52-week period ending on June 24, 2017. The fiscal periods presented in this report are 13-week and 40-week periods for the three and nine months ended March 31, 2018, respectively, and 13-week and 39-week periods for the three and nine months ended March 25, 2017, 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 operations, and resulted in net losses of $0.3 million and $0.8 million in the three and nine months ended March 31, 2018 and net losses of $0.4 million in the three and nine months ended March 31, 2017.

 

 

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. The majority of 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.  Some of our sales are to distributors which have limited stock rotation rights, which allow them to rotate a small portion of product in their inventory a maximum of two times per year.  We recognize revenue to these distributors upon shipment of product to the distributor, as the stock rotation rights are limited and we can reasonably estimate expected product returns when right of return exists.  When sales rebates, price allowances and stock rotations are applicable, they are estimated and recorded in the period the related revenue is recognized.

7

 


 

 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

(13.7

)

 

$

4.5

 

 

$

(122.6

)

 

$

31.0

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares, basic

 

 

34.5

 

 

 

34.8

 

 

 

34.0

 

 

 

34.9

 

Effect of dilutive share-based awards

 

 

-

 

 

 

0.6

 

 

 

-

 

 

 

0.8

 

Shares, diluted

 

 

34.5

 

 

 

35.4

 

 

 

34.0

 

 

 

35.7

 

Net income/(loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.40

)

 

$

0.13

 

 

$

(3.61

)

 

$

0.89

 

Diluted

 

$

(0.40

)

 

$

0.13

 

 

$

(3.61

)

 

$

0.87

 

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, market stock units, or MSUs, performance stock units, or PSUs, and our convertible notes.

Dilutive net income per share amounts do not include the potential weighted average effect of 2,818,358 and 2,380,552 shares of common stock related to certain share-based awards that were outstanding during the three months ended March 31, 2018 and 2017, respectively, and 2,427,566 and 1,739,783 shares of common stock related to certain share-based awards that were outstanding during the nine months ended March 31, 2018, and 2017, 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,

 

 

 

2018

 

 

2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

259.0

 

 

$

-

 

 

$

-

 

 

$

361.7

 

 

$

-

 

 

$

-

 

Auction rate securities

 

 

-

 

 

 

-

 

 

 

1.5

 

 

 

-

 

 

 

-

 

 

 

1.5

 

Total available-for-sale securities

 

$

259.0

 

 

$

-

 

 

$

1.5

 

 

$

361.7

 

 

$

-

 

 

$

1.5

 

 

In our condensed consolidated balance sheets, as of March 31, 2018 and June 30, 2017, money market balances were included in cash and cash equivalents, and auction rate securities, or ARS investments, were included in non-current other assets.

There were no changes in fair value of our Level 3 financial assets during the nine months ended March 31, 2018.  There were no transfers in or out of our Level 1, 2, or 3 assets during the nine months ended March 31, 2018 and 2017.

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.

 

 

8

 


5. Inventories

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

 

 

 

March 31,

 

 

June 30,

 

 

 

2018

 

 

2017

 

Raw materials and work-in-progress

 

$

71.4

 

 

$

94.7

 

Finished goods

 

 

37.1

 

 

 

36.7

 

 

 

$

108.5

 

 

$

131.4

 

 

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.  

 

 

6. Acquisitions

Conexant

On June 11, 2017, we entered into a securities purchase agreement to acquire all of the outstanding limited liability company interests of Conexant Systems, LLC, or Conexant, a technology leader in voice and audio processing solutions for the smart home, or the Conexant Acquisition.  The Conexant Acquisition is intended to increase our presence in the smart home market and increase opportunities to grow revenue.  Effective July 25, 2017, or the Conexant Closing Date, we completed the Conexant Acquisition for an initial purchase price of (i) $305.4 million in cash (on a cash-free, debt-free basis) and (ii) 726,666 shares of our common stock, or the Stock Consideration, valued at $39.1 million, and (iii) the assumption of a $3.5 million stock appreciation rights liability, with $16.8 million of the purchase price held in escrow to secure the seller’s indemnification obligations under the purchase agreement and $7.0 million of the purchase price held in escrow to secure the seller’s adjustment escrow obligations under the purchase agreement.  Subsequently, we determined that $1.8 million of net adjustments to the purchase price were required, reducing the acquisition date fair value of the consideration transferred to a total of $346.2 million. The Stock Consideration was issued at closing in an exempt private placement. On August 4, 2017, we filed a shelf registration statement on Form S-3 with the SEC providing for the registered resale of the Stock Consideration.  

The acquisition has been accounted for using the purchase method of accounting in accordance with the business acquisition guidance. Under the purchase accounting method, the total estimated purchase consideration of the acquisition was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their relative fair values. The excess of the purchase consideration over the net tangible and identifiable intangible assets acquired and liabilities has been recorded as goodwill. Our estimate of the fair values of the acquired intangible assets at March 31, 2018, is preliminary and subject to change and is based on established and accepted valuation techniques performed with the assistance of our third-party valuation specialists.  Additional information, which existed as of the Conexant 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 Conexant Closing Date.  Changes to amounts recorded as inventory, other current assets, acquired intangible assets and other accrued liabilities will be recorded as adjustments to the provisional amounts recognized as of the Conexant Closing Date and may result in a corresponding adjustment to goodwill in the period in which new information becomes available.

9

 


The following table summarizes the provisional amounts recorded for the estimated fair values of the assets acquired and liabilities assumed as of the Conexant Closing Date (in millions):

 

Cash

 

$

4.3

 

Accounts receivable

 

 

11.7

 

Inventory

 

 

51.0

 

Other current assets

 

 

3.5

 

Property and equipment

 

 

3.2

 

Acquired intangible assets

 

 

116.9

 

Other assets

 

 

0.9

 

Total identifiable assets acquired

 

 

191.5

 

Accounts payable

 

 

14.2

 

Accrued compensation

 

 

1.3

 

Other accrued liabilities

 

 

9.0

 

Other long-term liabilities

 

 

3.0

 

Net identifiable assets acquired

 

 

164.0

 

Goodwill

 

 

182.2

 

Net assets acquired

 

$

346.2

 

 

As of September 30, 2017, and December 30, 2017, the preliminary estimate of the intangible assets was $152.5 million.  As of March 31, 2018, we have revised our preliminary estimate of the intangible assets to $116.9 million which resulted in a $35.6 million reduction to the intangible assets and a corresponding increase to goodwill.  As a result, a $2.2 million increase in operating income/(loss) related to the six months ended December 30, 2017, was recognized in the condensed consolidated statement of operations for the three months ended March 31, 2018. The change in operating income/(loss) was primarily attributed to a decrease of $0.9 million to cost of revenue related to the amortization of acquired intangible assets and a decrease of $1.3 million in operating expenses related to the amortization of acquired intangible assets.

The revised preliminary estimate of the intangible assets as of March 31, 2018, totaling $116.9 million included the following: $93.2 million was allocated to developed technology and will amortize over an estimated weighted average useful life of 5 years; $21.7 million was allocated to customer relationships and will be amortized over an estimated useful life of 4 years, $1.7 million was allocated to trademarks and will be amortized over an estimated useful life of 7 years; and $0.3 million was allocated to backlog and will be amortized over an estimated useful life of less than 1 year.  Developed technology consists of semiconductor system solutions for audio and imaging applications.  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 8% to 12%.  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 Conexant as of the Conexant Closing Date.

As of March 31, 2018, all of the goodwill is expected to be deductible for income tax purposes.  

Prior to the Conexant Acquisition, we did not have an existing relationship or transactions with Conexant.  

The condensed consolidated financial statements include approximately $87.8 million of revenue and approximately $34.7 million of operating loss from Conexant from the Conexant Closing Date through March 31, 2018.

The following unaudited pro forma financial information (in millions, except per share data) presents the combined results of operations for us and Conexant as if the Conexant Acquisition had occurred on June 30, 2016. 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 Conexant Acquisition actually taken place on June 30, 2016, and should not be taken as indicative

10

 


of future consolidated operating results. Additionally, the unaudited pro forma financial results do not include any anticipated synergies or other expected benefits from the Conexant Acquisition.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

394.0

 

 

$

469.1

 

 

$

1,249.9

 

 

$

1,372.0

 

Net income/(loss)

 

 

(13.8

)

 

 

(0.4

)

 

 

(122.4

)

 

 

19.8

 

Net income/(loss) per share

 

 

(0.40

)

 

 

(0.01

)

 

 

(3.60

)

 

 

0.57

 

 

Pro forma adjustments used to arrive at pro forma net income for the three and nine months ended March 31, 2018, and 2017, were as follows (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Buyer transaction costs

 

$

-

 

 

$

-

 

 

$

0.9

 

 

$

-

 

Interest expense

 

 

-

 

 

 

(4.5

)

 

 

-

 

 

 

(13.6

)

Intangible amortization

 

 

-

 

 

 

(6.1

)

 

 

(1.7

)

 

 

(16.5

)

Depreciation

 

 

(0.2

)

 

 

(0.2

)

 

 

(0.3

)

 

 

(0.7

)

Income tax adjustment

 

 

0.1

 

 

 

3.8

 

 

 

0.3

 

 

 

10.8

 

Total

 

$

(0.1

)

 

$

(7.0

)

 

$

(0.8

)

 

$

(20.0

)

 

Marvell Multimedia Solutions Business

On June 11, 2017, the Company entered into an asset purchase agreement to acquire the assets of the multimedia solutions business of Marvell Technology Group Ltd., or Marvell, a leading provider of advanced video and audio processing applications for the smart home, or the Marvell Business Acquisition. The Marvell Business Acquisition is also intended to increase our presence in the smart home market and increase opportunities to grow revenue.  Effective September 8, 2017, or the Marvell Closing Date, we completed the Marvell Business Acquisition for a purchase price of $93.7 million in cash.  

The acquisition has been accounted for using the purchase method of accounting in accordance with the business acquisition guidance. Under the purchase accounting method, the total estimated purchase consideration of the acquisition was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their relative fair values. The excess of the purchase consideration over the net tangible and identifiable intangible assets acquired and liabilities has been recorded as goodwill. Our estimate of the fair values of the acquired intangible assets at March 31, 2018, is preliminary and subject to change and is based on established and accepted valuation techniques performed with the assistance of our third-party valuation specialists.  Additional information, which existed as of the Marvell 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 Marvell Closing Date.  Changes to amounts recorded as inventory and acquired intangible assets will be recorded as adjustments to the provisional amounts recognized as of the Marvell Closing Date and may result in a corresponding adjustment to goodwill in the period in which new information becomes available.

The following table summarizes the provisional amounts recorded for the estimated fair values of the assets acquired and liabilities assumed as of the Marvell Business Acquisition date (in millions):

 

Inventory

 

$

28.4

 

Property and equipment

 

 

5.0

 

Acquired intangible assets

 

 

45.7

 

Total identifiable assets acquired

 

 

79.1

 

Accrued liabilities

 

 

0.7

 

Net identifiable assets acquired

 

 

78.4

 

Goodwill

 

 

15.3

 

Net assets acquired

 

$

93.7

 

Of the $45.7 million of acquired intangible assets, $24.9 million was allocated to developed technology and will be amortized over an estimated weighted average useful life of 4 years; $16.2 million was allocated to customer relationships and will be amortized

11

 


over an estimated useful life of 4 years, $1.0 million was allocated to backlog and will be amortized over an estimated useful life of less than 1 year; and $3.6 million was allocated to in-process research and development and will be amortized over an estimated useful life to be determined at the date the underlying projects are deemed to be substantively complete.  Developed technology consists of semiconductor system solutions for advanced video and audio processing applications.  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 19%.  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 the transferred Marvell Business assets as of the Marvell Closing Date.

As of March 31, 2018, all of the goodwill is expected to be deductible for income tax purposes.  

Prior to the Marvell Business Acquisition, we did not have an existing relationship or transactions with Marvell.  

The condensed consolidated financial statements include approximately $98.1 million of revenue and approximately $12.7 million of operating loss from Marvell from the Marvell Closing Date through March 31, 2018.

The following unaudited pro forma financial information (in millions, except per share data) presents the combined results of operations for us and Marvell as if the Marvell Business Acquisition had occurred on June 30, 2016. 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 Marvell Business Acquisition actually taken place on June 30, 2016, 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 Marvell Business Acquisition. As the Marvell Business Acquisition was an asset acquisition and only a portion of Marvell Multimedia Solutions Business was acquired, the unaudited pro forma financial information has been prepared using certain estimates.

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

394.0

 

 

$

469.1

 

 

$

1,345.2

 

 

$

1,367.1

 

Net income/(loss)

 

 

(13.7

)

 

 

15.0

 

 

 

(121.3

)

 

 

19.8

 

Net income/(loss) per share

 

 

(0.40

)

 

 

0.45

 

 

 

(3.57

)

 

 

0.58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma adjustments used to arrive at pro forma net loss for the three and nine months ended March 31, 2018 and 2017, were as follows (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Buyer transaction costs

 

$

-

 

 

$

-

 

 

$

1.1

 

 

$

-

 

Interest expense

 

 

-

 

 

 

(4.9

)

 

 

-

 

 

 

(14.7

)

Intangible amortization

 

 

-

 

 

 

(5.6

)

 

 

(1.2

)

 

 

(7.3

)

Income tax adjustment

 

 

-

 

 

 

3.7

 

 

 

-

 

 

 

7.7

 

Total

 

$

-

 

 

$

(6.8

)

 

$

(0.1

)

 

$

(14.3

)

 

 

12

 


7. Acquired Intangibles and Goodwill

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, 2018 and June 30, 2017 (in millions):

 

 

 

Weighted Average

Life in Years

 

 

March 31, 2018

 

 

June 30, 2017

 

Display driver technology

 

 

5.3

 

 

$

164.0

 

 

$

164.0

 

Audio and video technology

 

 

4.7

 

 

 

118.2

 

 

 

-

 

Customer relationships

 

 

3.6

 

 

 

66.2

 

 

 

48.4

 

Fingerprint authentication technology

 

 

4.0

 

 

 

55.7

 

 

 

63.5

 

Licensed technology and other

 

 

4.3

 

 

 

9.0

 

 

 

1.3

 

Tradename

 

 

7.0

 

 

 

1.7