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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 September 26, 2020

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $.001 per share

SYNA

The Nasdaq Global Select Market

 

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 every Interactive Data File required to be submitted 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 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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

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 October 29, 2020: 34,518,242

 

 

 

 


 

SYNAPTICS INCORPORATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 26, 2020

TABLE OF CONTENTS

 

 

 

 

  

 

  

Page

Part I. Financial Information

  

 

 

 

 

 

   

 

Item 1.

   

Condensed Consolidated Financial Statements (Unaudited):

  

3

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets—September 26, 2020 and June 27, 2020

  

3

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income/(Loss)—Three Months Ended September 26, 2020 and September 28, 2019

 

4

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity

 

5

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows—Three Months Ended September 26, 2020 and September 28, 2019

  

6

 

 

 

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements

  

7

 

 

 

 

 

 

Item 2.

  

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

  

26

 

 

 

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

35

 

 

 

 

 

 

Item 4.

  

Controls and Procedures

  

35

 

 

Part II. Other Information

  

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

36

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

36

 

 

 

 

 

 

 

 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

36

 

 

 

 

 

 

Item 6.

  

Exhibits

  

37

 

 

 

 

 

 

 

Signatures

  

38

 

 

 


 

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)

 

 

 

September

 

 

June

 

 

 

2020

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

180.2

 

 

$

763.4

 

Short-term investments

 

 

63.7

 

 

 

 

Accounts receivable, net of allowances of $5.8 at September 2020 and June 2020

 

 

227.8

 

 

 

195.3

 

Inventories

 

 

114.6

 

 

 

102.0

 

Prepaid expenses and other current assets

 

 

33.7

 

 

 

16.9

 

Total current assets

 

 

620.0

 

 

 

1,077.6

 

Property and equipment at cost, net of accumulated depreciation of $135.1 and $131.2 at

   September 2020 and June 2020, respectively

 

 

90.5

 

 

 

84.3

 

Goodwill

 

 

570.9

 

 

 

360.8

 

Acquired intangibles, net

 

 

386.2

 

 

 

93.4

 

Non-current other assets

 

 

107.3

 

 

 

77.7

 

 

 

$

1,774.9

 

 

$

1,693.8

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

77.2

 

 

$

60.6

 

Accrued compensation

 

 

60.5

 

 

 

59.5

 

Income taxes payable

 

 

17.2

 

 

 

33.0

 

Other accrued liabilities

 

 

102.6

 

 

 

91.0

 

Total current liabilities

 

 

257.5

 

 

 

244.1

 

Long-term debt

 

 

100.0

 

 

 

100.0

 

Convertible notes, net

 

 

491.4

 

 

 

486.6

 

Other long-term liabilities

 

 

87.3

 

 

 

44.0

 

Total liabilities

 

 

936.2

 

 

 

874.7

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

$0.001 par value; 120,000,000 shares authorized, 66,168,565 and 65,871,648 shares

   issued, and  34,419,370 and 34,122,453 shares outstanding, at September 2020

   and June 2020, respectively

 

 

0.1

 

 

 

0.1

 

Additional paid-in capital

 

 

1,362.6

 

 

 

1,340.2

 

Treasury stock:  31,749,195 common treasury shares at September

   2020 and June 2020, at cost

 

 

(1,222.6

)

 

 

(1,222.6

)

Retained earnings

 

 

698.6

 

 

 

701.4

 

Total stockholders' equity

 

 

838.7

 

 

 

819.1

 

 

 

$

1,774.9

 

 

$

1,693.8

 

 

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

3


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(in millions, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

 

September

 

 

 

2020

 

 

2019

 

Net revenue

 

$

328.4

 

 

$

339.9

 

Cost of revenue

 

 

193.9

 

 

 

213.7

 

Gross margin

 

 

134.5

 

 

 

126.2

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

80.9

 

 

 

86.0

 

Selling, general, and administrative

 

 

35.3

 

 

 

27.5

 

Acquired intangibles amortization

 

 

6.7

 

 

 

2.9

 

Restructuring costs

 

 

5.6

 

 

 

6.6

 

Total operating expenses

 

 

128.5

 

 

 

123.0

 

Operating income

 

 

6.0

 

 

 

3.2

 

Interest and other expense, net

 

 

(4.7

)

 

 

(3.6

)

Income/(loss) before provision/(benefit) for income taxes

   and equity investment loss

 

 

1.3

 

 

 

(0.4

)

Provision/(benefit) for income taxes

 

 

3.6

 

 

 

(4.9

)

Equity investment loss

 

 

(0.5

)

 

 

(0.5

)

Net income/(loss) and Comprehensive income/(loss)

 

$

(2.8

)

 

$

4.0

 

Net income/(loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.08

)

 

$

0.12

 

Diluted

 

$

(0.08

)

 

$

0.12

 

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

 

 

 

 

 

 

 

 

Basic

 

 

34.2

 

 

 

33.0

 

Diluted

 

 

34.2

 

 

 

33.6

 

 

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

4


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions, except share amounts)

(unaudited)

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury

 

 

Retained

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Earnings

 

 

Equity

 

Balance at June 2020

 

 

65,871,648

 

 

$

0.1

 

 

$

1,340.2

 

 

$

(1,222.6

)

 

$

701.4

 

 

$

819.1

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.8

)

 

 

(2.8

)

Issuance of common stock for share-

   based award compensation plans

 

 

296,917

 

 

 

 

 

 

10.4

 

 

 

 

 

 

 

 

 

10.4

 

Payroll taxes for deferred stock units

 

 

 

 

 

 

 

 

(5.6

)

 

 

 

 

 

 

 

 

(5.6

)

Share-based compensation attributable to acquisition

 

 

 

 

 

 

 

 

3.2

 

 

 

 

 

 

 

 

 

3.2

 

Share-based compensation

 

 

 

 

 

 

 

 

14.4

 

 

 

 

 

 

 

 

 

14.4

 

Balance at September 2020

 

 

66,168,565

 

 

$

0.1

 

 

$

1,362.6

 

 

$

(1,222.6

)

 

$

698.6

 

 

$

838.7

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury

 

 

Retained

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Earnings

 

 

Equity

 

Balance at June 2019, as reported

 

 

64,283,948

 

 

$

0.1

 

 

$

1,266.1

 

 

$

(1,192.4

)

 

$

583.5

 

 

$

657.3

 

Cumulative effect of changes in accounting

   principles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.9

)

 

$

(0.9

)

Balance at June 2019, as adjusted

 

 

64,283,948

 

 

 

0.1

 

 

 

1,266.1

 

 

 

(1,192.4

)

 

 

582.6

 

 

 

656.4

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.0

 

 

 

4.0

 

Issuance of common stock for share-

   based award compensation plans

 

 

209,110

 

 

 

 

 

 

1.7

 

 

 

 

 

 

 

 

 

1.7

 

Payroll taxes for deferred stock units

 

 

 

 

 

 

 

 

(1.5

)

 

 

 

 

 

 

 

 

(1.5

)

Purchases of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(17.0

)

 

 

 

 

 

(17.0

)

Share-based compensation

 

 

 

 

 

 

 

 

11.2

 

 

 

 

 

 

 

 

 

11.2

 

Balance at September 2019

 

 

64,493,058

 

 

$

0.1

 

 

$

1,277.5

 

 

$

(1,209.4

)

 

$

586.6

 

 

$

654.8

 

 

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

5


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

 

 

 

Three Months Ended

 

 

 

September

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

(2.8

)

 

$

4.0

 

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

 

 

 

 

 

 

 

 

Share-based compensation costs

 

 

14.4

 

 

 

11.2

 

Depreciation and amortization

 

 

5.2

 

 

 

7.2

 

Acquired intangibles amortization

 

 

25.4

 

 

 

18.2

 

Deferred taxes

 

 

(3.7

)

 

 

(2.4

)

Amortization of convertible debt discount and issuance costs

 

 

4.8

 

 

 

4.5

 

Amortization of debt issuance costs

 

 

0.1

 

 

 

0.1

 

Amortization of cost of development services

 

 

1.7

 

 

 

 

Acquired in-process research and development

 

 

 

 

 

3.7

 

Equity investment loss

 

 

0.5

 

 

 

0.5

 

Foreign currency remeasurement loss

 

 

(0.7

)

 

 

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(25.4

)

 

 

(2.2

)

Inventories

 

 

20.5

 

 

 

20.5

 

Prepaid expenses and other current assets

 

 

(10.0

)

 

 

(1.9

)

Other assets

 

 

(11.4

)

 

 

(1.0

)

Accounts payable

 

 

11.7

 

 

 

2.6

 

Accrued compensation

 

 

(1.5

)

 

 

0.9

 

Income taxes payable

 

 

(16.2

)

 

 

(9.4

)

Other accrued liabilities

 

 

(6.1

)

 

 

(9.2

)

Net cash provided by operating activities

 

 

6.5

 

 

 

47.3

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash and cash equivalents acquired

 

 

(621.8

)

 

 

 

Purchase of in-process research and development

 

 

 

 

 

(2.5

)

Proceeds from maturities of investments

 

 

31.1

 

 

 

 

Purchases of property and equipment

 

 

(3.9

)

 

 

(5.0

)

Net cash used in investing activities

 

 

(594.6

)

 

 

(7.5

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Purchases of treasury stock

 

 

 

 

 

(17.0

)

Proceeds from issuance of shares

 

 

10.4

 

 

 

1.7

 

Payroll taxes for deferred stock and market stock units

 

 

(5.6

)

 

 

(1.5

)

Net cash provided by/(used in) financing activities

 

 

4.8

 

 

 

(16.8

)

Effect of exchange rate changes on cash and cash equivalents

 

 

0.1

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

 

(583.2

)

 

 

23.0

 

Cash and cash equivalents at beginning of period

 

 

763.4

 

 

 

327.8

 

Cash and cash equivalents at end of period

 

$

180.2

 

 

$

350.8

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

23.6

 

 

$

7.1

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment in current liabilities

 

$

1.0

 

 

$

1.9

 

 

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 27, 2020.

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 2021 and 2020 are 52-week periods ending June 26, 2021 and June 27, 2020, respectively. The fiscal periods presented in this report are 13-week periods ended September 26, 2020, and September 28, 2019.

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 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, including our expectations regarding the potential impacts on our business of the COVID-19 pandemic, 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.

Cash Equivalents and Short-Term Investments

Cash equivalents consist of highly liquid investments with original maturities of three months or less.  Our cash equivalents as of September 26, 2020 included bank deposits with a carrying value of $0.9 million, which approximates fair value, and as of June 27, 2020 they included money market accounts with a carrying value of $521.1 million, which approximates fair value, and are included in cash and cash equivalents on the condensed consolidated balance sheets.

Short-term investments comprise deposits held with banks with original maturities of greater than three months but less than one year when purchased.  All of our short-term investments are classified as investments recorded at amortized cost, which approximates fair value.  

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 $0.1 million in the three months ended September 26, 2020 and net gains of $0.4 million in the three months ended September 28, 2019.

Leases

We determine if a contract is a lease or contains a lease at the inception of the contract and reassess that conclusion if the contract is modified. All leases are assessed for classification as an operating lease or a finance lease. Operating lease right-of-use, or

7


 

ROU, assets are included in non-current other assets on our condensed consolidated balance sheet. Operating lease liabilities are separated into a current portion, included within accrued liabilities on our condensed consolidated balance sheet, and a non-current portion, included within other long-term liabilities on our condensed consolidated balance sheet. We do not have any finance lease ROU assets or liabilities. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We do not obtain and control the right to use the identified asset until the lease commencement date.

Our lease liabilities are recognized at the applicable lease commencement date based on the present value of the lease payments required to be paid over the lease term. Because the interest rate implicit in the lease is not readily determinable, we generally use our incremental borrowing rate to discount the lease payments to present value. The estimated incremental borrowing rate is derived from information available at the lease commencement date. We factor in publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. Our ROU assets are also recognized at the applicable lease commencement date. The ROU asset equals the carrying amount of the related lease liability, adjusted for any lease payments made prior to lease commencement and lease incentives provided by the lessor. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable ROU asset or lease liability.

The term of our leases equals the non-cancellable period of the lease, including any rent-free periods provided by the lessor, and also include options to renew or extend the lease (including by not terminating the lease) that we are reasonably certain to exercise. We establish the term of each lease at lease commencement and reassess that term in subsequent periods when one of the triggering events outlined in Topic 842 occurs. Operating lease cost for lease payments is recognized on a straight-line basis over the lease term.

Our lease contracts often include lease and non-lease components. For our leases, we have elected the practical expedient offered by the standard to not separate lease from non-lease components and account for them as a single lease component.

We have elected, for all classes of underlying assets, not to recognize ROU assets and lease liabilities for leases with a term of twelve months or less. Lease cost for short-term leases is recognized on a straight-line basis over the lease term.

 

 

2. Revenue Recognition

We account for revenue using Accounting Standards Codification Topic 606, or ASC 606, Revenue from Contracts with Customers. Our revenue is primarily generated from the sale of application specific integrated circuit chips, or ASIC chips, either directly to a customer or to a distributor. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. All of our revenue, except an inconsequential amount, is recognized at a point in time, either on shipment or delivery of the product, depending on customer terms and conditions. We generally warrant our products for a period of 12 months from the date of sale and estimate probable product warranty costs at the time we recognize revenue as the warranty is considered an assurance warranty and not a performance obligation. Non-product revenue is recognized over the same period of time such performance obligations are satisfied. We then select an appropriate method for measuring satisfaction of the performance obligations.

Revenue from sales to distributors is recognized upon shipment of the product to the distributors (sell-in basis). Master sales agreements are in place with certain customers, and these agreements typically contain terms and conditions with respect to payment, delivery, warranty and supply. In the absence of a master sales agreement, we consider a customer's purchase order or our standard terms and conditions to be the contract with the customer.

Our pricing terms are negotiated independently, on a stand-alone basis. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration which we expect to receive for the sale of such products. In limited situations, we make sales to certain customers under arrangements where we grant stock rotation rights, price protection and price allowances; variable consideration associated with these rights is expected to be inconsequential. These adjustments and incentives are accounted for as variable consideration, classified as other current liabilities under the revenue standard, and are shown as customer obligations in Note 9 Other Accrued Liabilities and Other Long-Term Liabilities. We estimate the amount of variable consideration for such arrangements based on the expected value to be provided to customers, and we do not believe that there will be significant changes to our estimates of variable consideration. When incentives, stock rotation rights, price protection, volume discounts, or price allowances are applicable, they are estimated and recorded in the period the related revenue is recognized. Stock rotation reserves are based on historical return rates and recorded as a reduction to revenue with a corresponding reduction to cost of goods sold for the estimated cost of inventory that is expected to be returned and recorded as prepaid expenses and other current assets. In limited circumstances, we enter into volume-based tiered pricing arrangements and we estimate total unit volumes under such arrangements to determine the expected transaction price for the units expected to be transferred. Such arrangements are accounted for as contract liabilities within other accrued liabilities. Sales returns liabilities are recorded as refund liabilities within other accrued liabilities.

8


 

Our accounts receivable balance is from contracts with customers and represents our unconditional right to receive consideration from customers. Payments are generally due within three months of completion of the performance obligation and subsequent invoicing and therefore, do not include significant financing components. To date, there have been no material bad debt charges recorded on accounts receivable. There were $0.5 million in contract assets recorded on the condensed consolidated balance sheets as of September 26, 2020 and $0.4 million as of June 27, 2020. Contract assets are presented as part of prepaid expenses and other current assets. Contract liabilities and refund liabilities were $5.9 million and $30.0 million, respectively, as of September 26, 2020, and $3.2 million and $25.8 million, respectively, as of June 27, 2020. Both contract liabilities and refund liabilities are presented as customer obligations in Note 9 Other Accrued Liabilities and Other Long-Term Liabilities. During the three months ended September 26, 2020, and the three months ended September 28, 2019, we recognized $0.6 million and $0.2 million, respectively, in revenue related to contract liabilities, which was outstanding as of the beginning of each such fiscal year.

We invoice customers for each delivery upon shipment and recognize revenue in accordance with delivery terms. As of September 26, 2020, we did not have any remaining unsatisfied performance obligations with an original duration greater than one year. Accordingly, under the optional exception provided by ASC 606, we do not disclose revenues allocated to future performance obligations of partially completed contracts. We account for shipping and handling costs as fulfillment costs before the customer obtains control of the goods and include these costs in cost of revenue. We account for collection of all taxes on a net basis.  

We incur commission expense that is incremental to obtaining contracts with customers. Sales commissions (which are recorded as a selling, general and administrative expense in the condensed consolidated statements of income) are expensed when the product is shipped because such commissions are owed after shipment.

Revenue from contracts with customers disaggregated by geographic area based on customer location and groups of similar products is presented in Note 14 Segment, Customers, and Geographical Information.

 

 

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

 

 

 

September

 

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

(2.8

)

 

$

4.0

 

Denominator:

 

 

 

 

 

 

 

 

Shares, basic

 

 

34.2

 

 

 

33.0

 

Effect of dilutive share-based awards

 

 

-

 

 

 

0.6

 

Shares, diluted

 

 

34.2

 

 

 

33.6

 

Net income/(loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.08

)

 

$

0.12

 

Diluted

 

$

(0.08

)

 

$

0.12

 

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, restricted stock units, or RSUs, 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 1,827,212 and 1,340,521 shares of common stock related to certain share-based awards that were outstanding during the three months ended September 26, 2020 and September 28, 2019, respectively. These share-based awards were not included in the computation of diluted net income per share because their effect would have been antidilutive.

 

 

9


 

4. Fair Value

Our carrying values of cash equivalents and short-term investments approximate their fair values due to the short period of time to maturity.  

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.

The fair value of our $525.0 million principal amount of 0.50% convertible notes due 2022 is measured at fair value for disclosure purposes. The fair value of the convertible notes as of September 26, 2020 and June 27, 2020 was approximately $639.5 and $542.5 million, respectively, based on the last trading price of the convertible notes for the periods presented.  

 

 

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):

 

 

 

September

 

 

June

 

 

 

2020

 

 

2020

 

Raw materials and work-in-progress

 

$

66.2

 

 

$

53.6

 

Finished goods

 

 

48.4

 

 

 

48.4

 

 

 

$

114.6

 

 

$

102.0

 

 

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

DisplayLink

On July 17, 2020, we entered into a definitive agreement to acquire 100% of equity interest in DisplayLink Corporation, or DisplayLink, a leader in high-performance video compression technology, for $305 million in cash adjusted for (i) estimated cash and cash equivalents and short-term investments at the closing (ii) estimated indebtedness outstanding immediately prior to the closing, (iii) unpaid portion as of the closing of certain transaction expenses incurred by DisplayLink, and (iv) the amount that the estimated working capital of DisplayLink exceeds or falls short, respectively, of a certain specified target working capital set forth in an Agreement and Plan of Merger, or the Merger Agreement, with $3.1 million of the purchase price held in escrow accounts for adjustments after closing and to secure the Seller Parties’ indemnification obligations under the Merger Agreement. The acquisition closed on July 31, 2020, or the DisplayLink Closing Date, whereupon we obtained high-performance video compression technology which will further enhance our current IoT business.   

This 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 September 26, 2020, 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 acquisition 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 DisplayLink Closing Date.  Changes to amounts will be recorded as adjustments to the provisional amounts recognized as of the DisplayLink Closing Date and may result in a corresponding adjustment to goodwill in the period in which new information becomes available.

10


 

The adjusted purchase price paid for DisplayLink was $443.2 million, which continues to be subject to change for working capital adjustments as allowed under the Merger Agreement.

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

 

Cash and cash equivalents

 

$

40.9

 

Short-term investments

 

 

94.0

 

Accounts receivable, net

 

 

7.1

 

Inventory

 

 

33.1

 

Prepaid expenses and other current assets

 

 

6.8

 

Property and equipment

 

 

6.8

 

Intangible assets

 

 

193.0

 

Right-of-use lease asset

 

 

20.0

 

Non-current other assets

 

 

0.6

 

Total identifiable assets acquired

 

 

402.3

 

Accounts payable

 

 

(5.2

)

Other accrued liabilities

 

 

(9.9

)

Short-term lease liabilities

 

 

(1.7

)

Long-term lease liabilities

 

 

(18.2

)

Other long-term liabilities

 

 

(31.4

)

Total liabilities

 

 

(66.4

)

Net identifiable assets acquired

 

 

335.9

 

Goodwill

 

 

107.3

 

Net assets acquired

 

$

443.2

 

 

 

 

 

 

 

The following table summarizes the preliminary estimate of the intangible assets as of the DisplayLink Closing Date (in millions):

 

 

 

Estimated Weighted Average Useful Lives in Years

 

 

Estimated Fair

Value

 

 

 

 

 

 

 

 

 

 

Developed technology

 

 

3.0

 

 

$

82.0

 

Customer contracts and related relationships

 

 

3.0

 

 

 

54.0

 

In process research and development

 

N/A

 

 

 

51.0

 

Trade names

 

 

4.0

 

 

 

3.0

 

Licensed technology

 

 

2.5

 

 

 

3.0

 

Estimated fair value of acquired intangibles

 

 

 

 

 

$

193.0

 

 

 

 

 

 

 

 

 

 

 

We 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 11.0% to 11.5%.  The fair value of these intangible assets is primarily affected by the projected revenue, gross margins, operating expenses, the technology migration curve, customer ramp up period 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.

In-process research and development consists of a next generation docking and video interface products for the IoT market. We expect to complete the in-process research and development project in early fiscal 2023.

 

11


 

The value of goodwill reflects the anticipated synergies of the combined operations and workforce of DisplayLink as of the DisplayLink Closing Date. As of September 26, 2020, none of th