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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements and Factors That May Affect Results

This Quarterly Report on Form 10-Q for the quarter ended March 26, 2022 (this "Report") contains forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business, including our expectations regarding the potential impacts on our business of the COVID-19 pandemic, and can be identified by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements may include words such as "expect," "anticipate," "intend," "believe," "estimate," "plan," "target," "strategy," "continue," "may," "will," "should," variations of such words, or other words and terms of similar meaning. All forward-looking statements reflect our best judgment and are based on several factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Such factors include, but are not limited to the following: our dependence on our solutions for the mobile product applications market and the PC product applications market for a substantial portion of our revenue; risks related to the volatility of our net revenue from our solutions for mobile product applications; our dependence on one or more large customers; the risk that our business, results of operations and financial condition (including liquidity) and prospects may be materially and adversely affected by health epidemics, including the COVID-19 pandemic; our exposure to industry downturns and cyclicality in our target markets; the risk that our product solutions for new markets will not be successful; global supply chain disruptions and component shortages that are currently affecting the semiconductor industry as a whole; our ability to maintain and build relationships with our customers; our dependence on third parties to maintain satisfactory manufacturing yields and deliverable schedule; and the risks as identified in the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" sections of our Annual Report on Form 10-K for the fiscal year ended June 26, 2021, and other risks as identified from time to time in our SEC reports. Forward-looking statements are based on information available to us on the date hereof, and we do not have, and expressly disclaim, any obligation to publicly release any updates or any changes in our expectations, or any change in events, conditions, or circumstances on which any forward-looking statement is based. Our actual results and the timing of certain events could differ materially from the forward-looking statements. These forward-looking statements do not reflect the potential impact of any mergers, acquisitions, or other business combinations that have not been completed as of the date of this filing.

Statements made in this Report, unless the context otherwise requires, include the use of the terms "us," "we," "our," the "Company" and "Synaptics" to refer to Synaptics Incorporated and its consolidated subsidiaries.

Impact of COVID-19

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. In response to the outbreak, governmental authorities implemented numerous containment measures, including travel bans and restrictions, quarantines, shelter-in-place orders, and business restrictions and shutdowns, resulting in rapidly changing market and economic conditions. In certain countries in which we operate, governments took swift and effective measures to stem the spread, while in other countries in which we operate governments were slow to react or missed opportunities to effectively contain the spread. Although some of these restrictions and other containment measures have since been lifted or scaled back, ongoing surges of COVID-19 have resulted in the re-imposition of certain restrictions and containment measures and may lead to other restrictions being re-implemented in the future in response to efforts to reduce the rapid spread of COVID-19 and its variants.

The health and wellbeing of our workforce is our highest priority. Many of our employees have worked from home at times during the COVID-19 pandemic in order to minimize the potential risk of spread of COVID-19 in our office environment, or as required by local governments, including ongoing mandatory lockdowns and forced quarantines in Shanghai. Many employees who have been fully vaccinated have returned to the office environment on a part- or full-time basis, where permitted. As more employees return to the office, we will continue to adhere to return to work protocols, based on guidance from local and global health organizations and applicable laws and regulations.

While the severity and duration of business disruption to our customers and suppliers due to the COVID-19 pandemic continues to remain uncertain, we expect that the ongoing global vaccination programs will continue to moderate the overall severity and duration and remain optimistic the most significant impact has passed. As more COVID-19 variants continue to emerge, some of which may be more infectious and may have greater resistance to the existing vaccines, we could experience episodes of renewed and sustained business disruption. To date, we have not incurred significant disruptions to our business or a materially negative impact on our condensed consolidated results of operations and financial condition from the COVID-19 outbreak, and we continue to believe our business will not be severely impacted as steps continue to be taken globally to mitigate the spread, vaccinate large portions of the population and achieve herd immunity.

We will continue to evaluate the nature and scope of the impact of COVID-19 to our business, consolidated results of operations, and financial condition and may take further actions altering our business operations and managing our costs and liquidity

that we deem necessary or appropriate to respond to this fast moving and uncertain global health crisis and the resulting global economic consequences.

Overview

We are a leading worldwide developer and supplier of custom-designed semiconductor solutions that is changing the way humans engage with connected devices and data, engineering exceptional experiences throughout the home, at work, in the car and on the go. Our current served markets include Internet of Things, or IoT, personal computer, or PC, and Mobile. We deliver complete chip, firmware and software semiconductor solutions that include connectivity products, audio input and output System-On-Chips, or SoCs, high-definition video and vision SoCs, SoCs with artificial intelligence capabilities, touch controllers, touchpads, display drivers and fingerprint biometric sensors.

We are a market leader in providing premium mixed signal semiconductor solutions to our target markets. Our Original Equipment Manufacturer, or OEM, customers include many of the world's largest OEMs for smart home devices, automotive solutions, notebook computers and peripherals, smartphones and tablets, and many large OEMs for audio and video products. We generally supply our product solutions to our OEM customers through their contract manufacturers, which take delivery of our products and pay us directly for such products.

Our manufacturing operations are based on a variable cost model in which we outsource all of our production requirements and generally drop ship our products directly to our customers from our contract manufacturers' facilities, eliminating the need for significant capital expenditures and allowing us to minimize our investment in inventories. This approach requires us to work closely with our contract manufacturers and semiconductor fabricators to ensure adequate production capacity to meet our forecasted volume requirements. As a result of recent supply constraints and capacity shortages affecting the global semiconductor industry, we have entered into long-term capacity and pricing agreements with some suppliers. We use third-party wafer manufacturers to supply wafers and third-party packaging manufacturers to package our proprietary application specific integrated circuits, or ASICs. In certain cases, we rely on a single source or a limited number of suppliers to provide other key components of our products. Our cost of revenue includes all costs associated with the production of our products, including materials; logistics; amortization of intangibles related to acquired developed technology; backlog; supplier arrangements; manufacturing, assembly, and test costs paid to third-party manufacturers; and related overhead costs associated with our indirect manufacturing operations personnel. Additionally, we charge all warranty costs, losses on inventory purchase obligations, and write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value, to cost of revenue.

Our gross margin generally reflects the combination of the added value we bring to our OEM customers' products by meeting their custom design requirements and the impact of our ongoing cost-improvement programs. These cost-improvement programs include reducing materials and component costs and implementing design and process improvements. Our newly introduced products may have lower margins than our more mature products, which have realized greater benefits associated with our ongoing cost-improvement programs. As a result, new product introductions may initially negatively impact our gross margin.

Our research and development expenses include costs for supplies and materials related to product development, as well as the engineering costs incurred to design ASICs and human experience solutions for OEM customers prior to and after our OEMs' commitment to incorporate those solutions into their products. In addition, we expense in-process research and development projects acquired as part of a business acquisition, which have not yet reached technological feasibility, and which have no foreseeable alternative future use. We continue to commit to the technological and design innovation required to maintain our position in our existing markets, and to adapt our existing technologies or develop new technologies for new markets.

Selling, general, and administrative expenses include expenses related to sales, marketing, and administrative personnel; internal sales and outside sales representatives' commissions; market and usability research; outside legal, accounting, and consulting costs; and other marketing and sales activities.

Acquired intangibles amortization, included in operating expenses, consists primarily of amortization of customer relationship and tradenames intangible assets recognized under the purchase method for business combinations.

Restructuring costs primarily reflect severance costs related to the restructuring of our operations to reduce operating expenses. These headcount related costs were in cost of revenue, research and development, and selling, general and administrative expenses.

Interest and other expense, net, primarily reflects loss on extinguishment of debt as discussed in Note 11 Debt to the condensed consolidated financial statements contained elsewhere in this Report, interest expense on our senior notes, convertible notes and revolving line of credit as well as the amortization of debt issuance costs and discount on our convertible notes, partially offset by interest income earned on our cash, cash equivalents and short-term investments.

The gain from the sale of our equity investment in OXI Technology Ltd., was recorded as part of the equity investment gain (loss) in the condensed consolidated statements of income.

Acquisitions

DSP Group, Inc.

On August 30, 2021, we entered into an agreement and plan of merger with DSP Group, Inc, or DSPG, to acquire all of the equity of DSPG for $22.00 per share of common stock. The transaction closed on December 2, 2021. As of March 26, 2022, our preliminary purchase consideration was $543.3 million, net of measurement period adjustments.

We financed the transaction through a combination of cash on hand and a new $600.0 million incremental term loan facility under our existing senior credit facility.

The results of DSPG are included in our condensed consolidated financial statements for the periods from December 3, 2021.

DisplayLink

On July 17, 2020, we entered into a definitive agreement to acquire all of the equity interests in DisplayLink Corporation, or DisplayLink, a leader in high-performance video compression technology. The acquisition closed on July 31, 2020. Our purchase consideration was $444.0 million. The results of DisplayLink are included in our condensed consolidated financial statements for the periods from August 1, 2020.

Broadcom

On July 2, 2020, we entered into definitive agreements with Broadcom, Inc., or Broadcom, to acquire certain assets and assume certain liabilities of, and obtain non-exclusive licenses relating to, Broadcom's existing Wi-Fi, Bluetooth and GPS/GNSS products and business in the IoT market, or Broadcom Business Acquisition, for an aggregate consideration of $250 million in cash which closed on July 23, 2020. We also entered into certain transition agreements with Broadcom for a period of three years. The results of the Broadcom Business Acquisition are included in our condensed consolidated financial statements for periods from July 24, 2020.

Divestitures

In December 2020, we completed the sale of limited audio technology intangible assets, received a fully-paid up perpetual license back from the buyer and, as an element of the transaction licensed other audio technology intangible assets to the buyer under a fully-paid up perpetual license arrangement. Under the asset purchase agreement and the intellectual property license agreement, we received $35.0 million in cash. The gain on the sale of the audio technology assets was $34.2 million.

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the nine months ended March 26, 2022, compared with our critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended June 26, 2021.

Trends and Uncertainties

Supply Chain

The availability of various products is dependent on our suppliers, their locations, and the extent to which they are impacted by logistical constraints, local COVID-19 protocols, or their allocation of available supply to us. We continue to monitor and proactively work with our supply chain partners to secure capacity to meet end-customer demand. Further, during fiscal 2022 we have seen input price increases from our supply chain partners; however, we have worked closely with many of our customers to pass-through these increases in a manner that has not materially impacted our results of operations for the three and nine months ended March 26, 2022.

Workforce

The ability to hire and secure critical hardware and software engineers to expand our research and development activities is currently constrained in many of the geographic markets in which we operate. The competition for available engineering talent has intensified for a variety of reasons resulting in wage inflation in the semiconductor development industry. Our ability to attract and retain skilled employees is critical to the long-term growth and success of our business.

Results of Operations

Beginning in fiscal 2022, we are accounting for virtual reality revenue in IoT product applications rather than Mobile product applications. To conform the prior period revenue presentation to the current period revenue presentation, we reclassified $5.4 million and $19.5 million of virtual reality product revenue from Mobile product applications to IoT product applications for the three and nine months ended March 27, 2021, respectively. Certain of the data used in our condensed consolidated statements of income for the periods indicated, together with comparative absolute and percentage changes in these amounts, were as follows (in millions, except percentages):







                                          Three Months Ended March                                  Nine Months Ended March
                               2022        2021        $ Change       % Change         2022          2021         $ Change       % Change
        IoT product
        applications          $ 301.6     $ 151.4     $    150.2           99.2 %    $   768.8     $   435.0     $    333.8           76.7 %
        PC product
        applications             90.1        98.4           (8.3 )         (8.4 %)       261.4         270.4           (9.0 )         (3.3 %)
        Mobile product
        applications             78.4        76.0            2.4            3.2 %        233.1         306.4          (73.3 )        (23.9 %)
        Net revenue             470.1       325.8          144.3           44.3 %      1,263.3       1,011.8          251.5           24.9 %
        Gross margin            253.8       155.5           98.3           63.2 %        677.0         440.4          236.6           53.7 %
        Operating expenses:
        Research and
        development              98.2        77.5           20.7           26.7 %        273.2         235.7           37.5           15.9 %
        Selling, general,
        and administrative       44.2        36.8            7.4           20.1 %        130.1         111.6           18.5           16.6 %
        Acquired
        intangibles
        amortization             12.0         8.7            3.3           37.9 %         29.6          24.1            5.5           22.8 %
        Restructuring costs      11.3         0.9           10.4           1156 %         17.8           7.1           10.7          150.7 %
        Gain on sale of
        audio technology
        assets                      -           -              -            0.0 %            -         (34.2 )         34.2          100.0 %
        Operating income         88.1        31.6           56.5          178.8 %        226.3          96.1          130.2          135.5 %
        Interest and other
        expense, net             (6.7 )      (7.0 )          0.3            4.3 %        (18.3 )       (17.7 )         (0.6 )         (3.4 %)
        Gain from sale and
        leaseback                 5.4           -            5.4          100.0 %          5.4             -            5.4          100.0 %
        Loss on redemption
        of convertible
        notes                       -           -              -              -           (8.1 )           -           (8.1 )            -
        Income before
        provision for
        income taxes             86.8        24.6           62.2          252.8 %        205.3          78.4          126.9          161.9 %
        Provision for
        income taxes             24.4        10.4           14.0          134.6 %         32.3          16.4           15.9           97.0 %
        Equity investment
        loss                      2.5        (0.4 )          2.9          725.0 %          1.6          (1.4 )          3.0          214.3 %
        Net income            $  64.9     $  13.8     $     51.1          370.3 %    $   174.6     $    60.6     $    114.0          188.1 %
        


Certain of the data used in our condensed consolidated statements of income presented here as a percentage of net revenue for the periods indicated were as follows:







                                                                    Percentage
                                        Three Months Ended            Point            Nine Months Ended          Percentage Point
                                               March                Increase/                March                   Increase/
                                        2022           2021         (Decrease)         2022          2021            (Decrease)
        IoT product applications           64.2 %        46.5 %            17.7 %         60.9 %       43.0 %                  17.9 %
        PC product applications            19.2 %        30.2 %           (11.0 %)        20.7 %       26.7 %                  (6.0 %)
        Mobile product applications        16.7 %        23.3 %            (6.6 %)        18.4 %       30.3 %                 (11.9 %)
        Net revenue                       100.1 %       100.0 %             0.1 %        100.0 %      100.0 %                   0.0 %
        Gross margin                       54.0 %        47.7 %             6.3 %         53.6 %       43.5 %                  10.1 %
        Operating expenses:
        Research and development           20.9 %        23.8 %            (2.9 %)        21.6 %       23.3 %                  (1.7 %)
        Selling, general, and
        administrative                      9.4 %        11.3 %            (1.9 %)        10.3 %       11.0 %                  (0.7 %)
        Acquired intangibles
        amortization                        2.6 %         2.7 %            (0.1 %)         2.3 %        2.4 %                  (0.1 %)
        Restructuring costs                 2.4 %         0.3 %             2.1 %          1.4 %        0.7 %                   0.7 %
        Gain on sale of audio
        technology assets                   0.0 %         0.0 %             0.0 %          0.0 %       (3.4 %)                  3.4 %
        Operating income                   18.7 %         9.7 %             9.0 %         17.9 %        9.5 %                   8.4 %
        Interest and other expense,
        net                                (1.4 %)       (2.1 %)            0.7 %         (1.4 %)      (1.7 %)                  0.3 %
        Gain from sale and
        leaseback                           1.1 %         0.0 %             1.1 %          0.4 %        0.0 %                   0.4 %
        Loss on redemption of
        convertible notes                   0.0 %         0.0 %             0.0 %         (0.6 %)       0.0 %                  (0.6 %)
        Income before provision for
        income taxes                       18.5 %         7.6 %            10.9 %         16.3 %        7.7 %                   8.6 %
        Provision for income taxes          5.2 %         3.2 %             2.0 %          2.6 %        1.6 %                   1.0 %
        Equity investment loss              0.5 %        (0.1 %)            0.6 %          0.1 %       (0.1 %)                  0.2 %
        Net income                         13.8 %         4.2 %             9.6 %         13.8 %        6.0 %                   7.8 %
        


Net Revenue

Net revenue was $470.1 million for the three months ended March 26, 2022, compared with $325.8 million for the three months ended March 27, 2021, an increase of $144.3 million, or 44.3%. Of this net revenue, $301.6 million, or 64.2%, was from IoT product applications, $90.1 million, or 19.2%, was from PC product applications, and $78.4 million, or 16.7%, was from Mobile product applications. The increase in net revenue for the three months ended March 26, 2022 was primarily attributable to an increase in net revenue from IoT and Mobile product applications, partially offset by a decrease in net revenue from PC product applications. Net revenue from IoT product applications increased as a result of an increase in units sold (which increased 66%) as well as higher average selling prices (which increased 19.9%) due to product sales mix. Net revenue from PC product applications decreased due to a decline in units sold related to certain end customers' supply chain constraints (which decreased 30.6%) and partially offset by higher average selling prices (which increased 31.9%) due to our product sales mix. Net revenue from Mobile product applications increased due to higher average selling prices (which increased 12.4%) and partially offset by a decline in units sold (which decreased 8.2%).

Net revenue was $1,263.3 million for the nine months ended March 26, 2022, compared with $1,011.8 million for the nine months ended March 27, 2021, an increase of $251.5 million, or 24.9%. Of this net revenue, $768.8 million, or 60.9%, was from IoT product applications, $261.4 million, or 20.7%, was from PC product applications, and $233.1 million, or 18.4%, was from Mobile product applications. The increase in net revenue for the nine months ended March 26, 2022 was primarily attributable to an increase in net revenue from IoT product applications, partially offset by a decrease in net revenue from PC and Mobile product applications. Net revenue from IoT product applications increased as a result of an increase in units sold (which increased 34.4%) as well as higher average selling prices (which increased 31.5%) due to product sales mix. Net revenue from PC product applications decreased due to a decline in units sold (which decreased 19.4%) partially offset by higher average selling prices (which increased 19.9%) due to our product sales mix. Net revenue from Mobile product applications decreased due to a decline in units sold (which decreased 25.2%) for Mobile product applications partially offset by higher average selling prices (which increased 1.7%) due to our product sales mix.

Gross Margin

Gross margin as a percentage of net revenue was 54.0%, or $253.8 million, for the three months ended March 26, 2022, compared with 47.7%, or $155.5 million, for the three months ended March 27, 2021. The 630 basis point increase in gross margin for

the three months ended March 26, 2022, was due to an overall favorable product mix and an increase in average sales prices partially offset by a $9.2 million increase in acquired intangibles amortization and inventory fair value adjustments included in cost of revenue.

Gross margin as a percentage of net revenue was 53.6% or $677.0 million, for the nine months ended March 26, 2022, compared with 43.5%, or $440.4 million, for the nine months ended March 27, 2021. The 1,010 basis point increase in gross margin for the nine months ended March 26, 2022, was due to an overall favorable product mix driven and an increase in average sales prices as well as a $13.2 million decrease in acquired intangibles amortization and inventory fair value adjustments included in cost of revenue.

Because we sell our technology solutions in designs that are generally unique or specific to an OEM customer's application, gross margin varies on a product-by-product basis, making our cumulative gross margin a blend of our product specific designs. As a fabless manufacturer, our gross margin percentage is generally not materially impacted by our shipment volume. We charge losses on inventory purchase obligations and write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value (including warranty costs) to cost of revenue.

Operating Expenses

Research and Development Expenses. Research and development expenses increased $20.7 million to $98.2 million for the three months ended March 26, 2022, compared with $77.5 million for the three months ended March 27, 2021. The increase in research and development expenses primarily reflected a $5.1 million increase in share-based compensation costs primarily related to an increased stock price which impacted the value of the new grants and the phantom stock units accrual and an increase in payroll and variable compensation costs of $10.8 million, which includes costs associated with research and development headcount from our DSPG acquisition, which closed on December 2, 2021.

Research and development expenses increased $37.5 million to $273.2 million for the nine months ended March 26, 2022, compared with $235.7 for the nine months . . .

May 05, 2022

COMTEX_406757917/2041/2022-05-05T17:28:05

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