SYNAPTICS INCORPORATED Forward-Looking Statements and Factors That May Affect Results
This Quarterly Report on Form 10-Q for the quarter endedDecember 28, 2019 (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"). For ease of presentation, this Report shows reporting periods ending on calendar quarter end dates as of and for all periods presented, unless otherwise indicated. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business, 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 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 endedJune 29, 2019 , and other risks as identified from time to time in ourSEC 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 had 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 toSynaptics Incorporated and its consolidated subsidiaries.
Overview
We are a leading worldwide developer and supplier of custom-designed human interface semiconductor product solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing, communications, entertainment, and other electronic devices. We currently generate revenue from the markets for smartphones, tablets, personal computer, or PC, products, primarily notebook computers, Internet of Things, or IoT, products which include smart devices with voice, speech and video solutions, and other select electronic devices, including devices in automobiles, with our custom human interface solutions. The solutions we deliver either contain or consist of our touch-, display driver-, fingerprint authentication-based-, voice and speech-, or video-semiconductor solutions, which include our chip, customer-specific firmware, and software. Many of our customers have manufacturing operations inChina , and many of our OEM customers have established design centers inAsia . With our expanding global presence, including offices inChina ,Hong Kong ,India ,Japan ,Korea ,Switzerland ,Taiwan , andthe United States , we are well positioned to provide local sales, operational, and engineering support services to our existing customers, as well as potential new customers, on a global basis. 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. We provide our contract manufacturers with six-month rolling forecasts and issue purchase orders based on our anticipated requirements for the next 90 days. However, we generally do not have long-term supply contracts with our contract manufacturers. We use third-party wafer manufacturers to supply wafers and third-party packaging manufacturers to package our proprietary 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. 24 -------------------------------------------------------------------------------- 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 interface 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 asset acquisitions, 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 and facilities consolidation costs related to the restructuring of our operations to reduce operating expenses. These headcount and facilities related costs were in cost of revenue, research and development, and selling, general and administrative expenses.
Interest and other expense, net, primarily reflects interest expense on our convertible notes as well as the amortization of debt issuance costs and discount on our convertible notes, partially offset by interest income earned on our cash and cash equivalents as well as impairment recovery on investments.
Equity investment loss includes amortization of intangible assets as well as our
portion of the net loss reflected under the equity method of accounting in
connection with our investment in
Divestiture
InDecember 2019 , we entered into an asset purchase agreement with a third party to sell the assets of our LCD Touch Controller and Display Driver Integration, or TDDI, product line for LCD mobile displays. We will retain our automotive TDDI product line and our discrete touch and discrete display driver product lines supporting LCD and OLED for the mobile market. Subject to certain post-closing adjustments and indemnification obligations, the aggregate consideration payable by the buyer will be$120.0 million in cash, the dollar value of specified inventory at a purchase price of standard cost plus 5% in cash, and the assumption of certain liabilities, as set forth in the asset purchase agreement. The transaction is expected to close in the fourth quarter of fiscal 2020, subject to satisfaction of certain closing conditions.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates during the three months endedDecember 31, 2019 , 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 endedJune 29, 2019 . 25 --------------------------------------------------------------------------------
Results of Operations
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 December 31, Six Months Ended December 31,
2019 2018 $ Change %
Change 2019 2018 $ Change % Change
Mobile product applications
81.6 63.9 17.7 27.7 % 149.4 132.5 16.9 12.8 %
IoT product applications 89.0 87.2 1.8 2.1 % 176.8 173.5 3.3 1.9 %
Net revenue 388.3 425.5 (37.2 ) (8.7 %) 728.2 843.1 (114.9 ) (13.6 %)
Gross margin 159.3 149.8 9.5 6.3 % 285.5 290.7 (5.2 ) (1.8 %) Operating expenses: Research and development 77.0 84.2
(7.2 ) (8.6 %) 163.0 174.3 (11.3 ) (6.5 %)
Selling, general, and
administrative 31.5 35.6 (4.1 ) (11.5 %) 59.0 69.4 (10.4 ) (15.0 %)
Acquired intangibles
amortization 3.0 2.9 0.1 3.4 % 5.9 5.8 0.1 1.7 %
Restructuring costs 13.3 2.1 11.2 533.3 % 19.9 10.4 9.5 91.3 %
Operating income 34.5 25.0 9.5 38.0 % 37.7 30.8 6.9 22.4 %
Interest and other expense,
net (2.3 ) (4.3 ) 2.0 46.5 % (5.9 ) (6.2 ) 0.3 4.8 %
Income/(loss) before
provision/
(benefit) for income
taxes 32.2 20.7 11.5 55.6 % 31.8 24.6 7.2 29.3 %
Provision/(benefit) for
income taxes 12.0 7.5 4.5 60.0 % 7.1 7.2 (0.1 ) (1.4 %) Equity investment loss
(0.4 ) (0.4 ) - 0.0 % (0.9 ) (0.8 ) (0.1 ) (12.5 %)
Net income $ 19.8 $ 12.8 $ 7.0 54.7 % $ 23.8 $ 16.6 $ 7.2 43.4 %
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 Six Months Ended Percentage Point
December 31, Increase/ December 31, Increase/
2019 2018 (Decrease) 2019 2018 (Decrease)
Mobile product applications 56.1 % 64.5 % (8.4 %) 55.2 % 63.7 % (8.5 %)
PC product applications 21.0 % 15.0 % 6.0 % 20.5 % 15.7 % 4.8 %
IoT product applications 22.9 % 20.5 % 2.4 % 24.3 % 20.6 % 3.7 %
Net revenue 100.0 % 100.0 % 0.0 % 100.0 % 100.0 % 0.0 %
Gross margin 41.0 % 35.2 % 5.8 % 39.2 % 34.5 % 4.7 %
Operating expenses:
Research and development 19.8 % 19.8 % 0.0 % 22.4 % 20.7 % 1.7 %
Selling, general, and administrative 8.1 % 8.4 % (0.3 %) 8.1 % 8.2 %
(0.1 %)
Acquired intangibles amortization 0.8 % 0.7 % 0.1 % 0.8 % 0.7 % 0.1 %
Restructuring costs 3.4 % 0.5 % 2.9 % 2.7 % 1.2 % 1.5 %
Operating income 8.9 % 5.9 % 3.0 % 5.2 % 3.7 % 1.5 %
Interest and other expense, net (0.6 %) (1.0 %) 0.4 % (0.8 %) (0.7 %) (0.1 %)
Income/(loss) before provision/
(benefit) for income taxes 8.3 % 4.9 % 3.4 % 4.4 % 2.9 % 1.5 %
Provision/(benefit) for income taxes 3.1 % 1.8 % 1.3 % 1.0 % 0.9 % 0.1 %
Equity investment loss (0.1 %) (0.1 %) 0.0 % (0.1 %) (0.1 %) 0.0 %
Net income 5.1 % 3.0 % 2.1 % 3.3 % 2.0 % 1.3 %
26
--------------------------------------------------------------------------------
Net Revenue
Net revenue was$388.3 million for the three months endedDecember 31, 2019 , compared with$425.5 million for the three months endedDecember 31, 2018 , a decrease of$37.2 million , or 8.7%. Of this net revenue,$217.7 million , or 56.1%, was from Mobile product applications,$89.0 million , or 22.9%, was from IoT product applications, and$81.6 million , or 21.0%, was from PC product applications. The decrease in net revenue for the three months endedDecember 31, 2019 was primarily attributable to a decrease in net revenue from Mobile product applications, partially offset by an increase in net revenue from PC product applications and IoT product applications. Net revenue from Mobile product applications decreased as a result of a decline in units sold (which decreased 18.4%) as well as slightly lower average selling prices for Mobile product applications. Net revenue from PC product applications increased due to a growth in units sold (which increased 13.9%) for PC product applications as well as higher average selling prices (which increased 12.1%). Net revenue from IoT product applications increased as a result of an increase in units sold, partially offset by lower average selling prices for IoT product applications. Net revenue was$728.2 million for the six months endedDecember 31, 2019 , compared with$843.1 million for the six months endedDecember 31, 2018 , a decrease of$114.9 million , or 13.6%. Of this net revenue,$402.0 million , or 55.2%, was from Mobile product applications,$176.8 million , or 24.3%, was from IoT product applications, and$149.4 million , or 20.5%, was from PC product applications. The decrease in net revenue for the six months endedDecember 31, 2019 was primarily attributable to a decrease in net revenue from Mobile product applications, partially offset by an increase in net revenue from PC product applications and IoT product applications. Net revenue from Mobile product applications decreased as a result of a decline in units sold (which decreased 24.9%) as well as slightly lower average selling prices for Mobile product applications. Net revenue from PC product applications increased due to higher average selling prices (which increased 12.8%). Net revenue from IoT product applications increased as a result of an increase in units sold, partially offset by lower average selling prices for IoT product applications.
Gross Margin
Gross margin as a percentage of net revenue was 41.0%, or
Gross margin as a percentage of net revenue was 39.2%, or$285.5 million , for the six months endedDecember 31, 2019 , compared with 34.5%, or$290.7 million , for the six months endedDecember 31, 2018 . The 470 basis point increase in gross margin for the six months endedDecember 31, 2019 , was primarily due to a favorable product mix and a$8.6 million decrease in amortization for amortizable intangibles which are now fully amortized. We continually introduce new product solutions, many of which have life cycles of less than one year. Further, 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 virtual 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 decreased$7.2 million to$77.0 million for the three months endedDecember 31, 2019 , compared with the three months endedDecember 31, 2018 . The decrease in research and development expenses primarily reflected a net$1.9 million decrease in personnel-related costs, which was due to a decrease in average headcount for the three months endedDecember 31, 2019 as compared to the three months endedDecember 31, 2018 , as a result of restructuring activities to reduce operating costs; a$1.9 million decrease in infrastructure costs related to facilities; a$1.8 million decrease in non-employee services; and a$1.0 million decrease in travel related costs. The decrease in personnel-related costs was partially offset by$2.0 million of retention program costs with key engineering and management employees designed to ensure operational continuity and support as we transition the company through senior level management and product focus changes. Research and development expenses decreased$11.3 million to$163.0 million for the six months endedDecember 31, 2019 , compared with the six months endedDecember 31, 2018 . The decrease in research and development expenses primarily reflected a net$3.7 million decrease in personnel-related costs which was due to a decrease in average headcount for the six months endedDecember 31, 2019 as compared to the six months endedDecember 31, 2018 , as a result of restructuring activities to reduce operating costs; a$3.0 million decrease in non-employee services; a$2.6 million decrease in infrastructure costs related to facilities; a$2.1 million decrease in project related costs; a$1.7 million decrease in travel related costs; and a$1.2 million decrease in software licensing and maintenance costs. The decrease in personnel-related costs was partially offset by$4.4 million of retention program costs with key engineering and management employees designed to ensure operational continuity and support as we transition the company through senior level management and product focus changes. 27 -------------------------------------------------------------------------------- Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased$4.1 million to$31.5 million for the three months endedDecember 31, 2019 , compared with the three months endedDecember 31, 2018 . The decrease in selling, general, and administrative expenses primarily reflected a net$1.6 million decrease in personnel-related costs which was primarily due to a reduction in headcount as a result of restructuring activities to reduce operating costs; a$1.2 million decrease in non-employee services; a$1.2 million decrease in bad debt expense; a$0.9 million decrease in travel related expenses; partially offset by a$1.1 million increase in legal fees. The decrease in personnel-related costs was partially offset by$1.5 million of retention program costs with key management employees designed to ensure operational continuity and support as we transition the company through senior level management and product focus changes. Selling, general, and administrative expenses decreased$10.4 million to$59.0 million for the six months endedDecember 31, 2019 , compared with the six months endedDecember 31, 2018 . The decrease in selling, general, and administrative expenses primarily reflected a net$7.3 million decrease in personnel-related costs which was primarily due to a reduction in headcount as a result of restructuring activities to reduce operating costs; a$2.3 million decrease in non-employee services; a$1.5 million decrease in bad debt expense; a$1.4 million decrease in travel related expenses; partially offset by a$1.7 million increase in legal fees. The decrease in personnel-related costs was partially offset by$2.8 million of retention program costs with key management employees designed to ensure operational continuity and support as we transition the company through senior level management and product focus changes. Acquired Intangibles Amortization. Acquired intangibles amortization reflects the amortization of intangibles acquired through acquisitions. For further discussion of acquired intangibles amortization, see Note 7 Acquired Intangibles andGoodwill included in the condensed consolidated financial statements contained elsewhere in this Report. Restructuring Costs. Restructuring costs of$19.9 million in the six months endedDecember 31, 2019 reflect severance costs for restructuring of our operations to reduce ongoing operating costs, which commenced in the fourth quarter of fiscal 2019 and the second quarter of fiscal 2020. The restructuring activities are expected to be complete in the fourth quarter of fiscal 2020. See Note 16 Restructuring Activities included in the condensed consolidated financial statements contained elsewhere in this Report. Interest and Other Expense, Net. Interest and other expense, net primarily includes the amortization of debt discount and issuance costs, as well as interest on our debt, partially offset by interest income earned on our cash and cash equivalents as well as impairment recovery on investments. Interest and other expense, net was relatively flat at$5.9 million for the six months endedDecember 31, 2019 , as compared to$6.2 million for the six months endedDecember 31, 2018 . Provision for Income Taxes. We account for income taxes under the asset and liability method. The provision for income taxes recorded in interim periods is recorded by applying the estimated annual effective tax rate to year-to-date income before provision for income taxes, excluding the effects of significant unusual or infrequently occurring discrete items. The tax effects of discrete items are recorded in the same period that the related discrete items are reported and results in a difference between the actual effective tax rate and the estimated annual effective tax rate. The provision for income taxes of$12.0 million and$7.5 million for the three months endedDecember 31, 2019 and 2018, respectively, represented estimated federal, foreign, and state income taxes. The effective tax rate for the three months endedDecember 31, 2019 diverged from the combinedU.S. federal and state statutory tax rate primarily because of foreign withholding taxes, the impact of accounting for qualified stock options, and global intangible low-taxed income, or GILTI, partially offset by the benefit of research credits, foreign tax credits and income taxed at lower tax rates. The effective tax rate for the three months endedDecember 31, 2018 , diverged from the combinedU.S. federal and state statutory tax rate, primarily because of foreign withholding taxes, nondeductible amortization, the impact of net shortfalls in share-based compensation deductions and GILTI, partially offset by the benefit of research credits, foreign tax credits, foreign-derived intangible income deduction, release of reserves related to uncertain tax positions and foreign income taxed at lower tax rates. The provision for income taxes of$7.1 million and$7.2 million for the six months endedDecember 31, 2019 and 2018, respectively, represented estimated federal, foreign, and state income taxes. The effective tax rate for the six months endedDecember 31, 2019 diverged from the combinedU.S. federal and state statutory tax rate primarily because of foreign withholding taxes, the impact of accounting for qualified stock options and global intangible low-taxed income, or GILTI, partially offset by the benefit of research credits, foreign tax credits and foreign income taxed at lower tax rates. The effective tax rate for the six months endedDecember 31, 2018 , diverged from the combinedU.S. federal and state statutory tax rate, primarily due to foreign withholding taxes, nondeductible amortization, the impact of net shortfalls in share-based compensation deductions and GILTI, partially offset by the benefit of research credits, foreign tax credits, foreign-derived intangible income deduction, excess share-based compensation deductions, release of reserves related to uncertain tax positions and foreign income taxed at lower tax rates. 28 -------------------------------------------------------------------------------- InJune 2019 , theU.S. Ninth Circuit Court of Appeals reversed the 2015 decision of theU.S. Tax Court inAltera Corp. v. Commissioner which found that theTreasury regulations addressing the treatment of stock-based compensation in a cost-sharing arrangement with a related party were invalid. As our tax filing position is consistent with theTreasury regulations, no adjustment to our financial statements is required. However, due to uncertainties with respect to the ultimate resolution, we will continue to monitor developments in this case.
Liquidity and Capital Resources
Our cash and cash equivalents were$424.8 million as ofDecember 31, 2019 , compared with$327.8 million as ofJune 30, 2019 , an increase of$97.0 million . The increase primarily reflected$120.0 million of net cash provided by operating activities,$4.8 million of net proceeds from issuance of shares, partially offset by$17.0 million used to repurchase 555,663 shares of our common stock,$8.2 million used for the purchase of property and equipment, and$2.5 million used for an asset acquisition completed inAugust 2019 . At this time, we consider earnings of our foreign subsidiaries indefinitely invested overseas and have made no provision for income or withholding taxes, other than the one-time transition tax incurred as part of the Tax Cuts and Jobs Act, that may result from a future repatriation of those earnings. As ofDecember 31, 2019 ,$172.7 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations inthe United States , we would be required to accrue and payU.S. taxes to repatriate these funds. Cash Flows from Operating Activities. Operating activities during the six months endedDecember 31, 2019 generated$120.0 million compared with$63.5 million net cash generated during the six months endedDecember 31, 2018 . For the six months endedDecember 31, 2019 , the primary operating activities were adjustments for non-cash charges of$81.5 million and a net change in operating assets and liabilities of$14.7 million . The net change in operating assets and liabilities was primarily attributable to a$55.6 million decrease in inventory and a$15.1 million increase in accrued compensation, partially offset by a$30.0 million decrease in other accrued liabilities, a$16.4 million increase in accounts receivable, net, and a decrease of$7.4 million in accounts payable. FromJune 30, 2019 toDecember 31, 2019 , our days sales outstanding decreased from 70 days to 57 days due to a larger percentage of the quarter's net revenue occurring late in theJune 30, 2019 quarter compared with a smaller percentage of the quarter's net revenue occurring late in theDecember 31, 2019 quarter. Our annual inventory turns increased from five to eleven, which was driven by the classification of$20.9 million of inventory as current assets held for sale (which had an impact of 2 turns) as well as stronger product demand throughout the quarter. Cash Flows from Investing Activities. Cash used in investing activities during the six months endedDecember 31, 2019 consisted of$8.2 million for purchases of property and equipment and$2.5 million used for an asset acquisition completed inAugust 2019 . Cash Flows from Financing Activities. Net cash used in financing activities for the six months endedDecember 31, 2019 was$12.2 million compared with$73.1 million used in financing activities for the six months endedDecember 31, 2018 . Net cash used in financing activities for the six months endedDecember 31, 2019 was related to$17.0 million used to repurchase 555,663 shares of our common stock. Common Stock Repurchase Program. As ofDecember 31, 2019 , our board has cumulatively authorized$1.4 billion for our common stock repurchase program, which will expire inJuly 2021 . The program authorizes us to purchase our common stock in the open market or in privately negotiated transactions, depending upon market conditions and other factors. The number of shares purchased and the timing of purchases are based on the level of our cash balances, general business and market conditions, and other factors. Common stock purchased under this program is held as treasury stock. FromApril 2005 throughDecember 31, 2019 , we purchased 31,489,876 shares of our common stock in the open market for an aggregate cost of$1.2 billion . During the six months endedDecember 31, 2019 , we repurchased 555,663 shares of our common stock for a total cost of$17.0 million . As ofDecember 31, 2019 , the remaining available authorization under our common stock repurchase program was$190.6 million .
Convertible Debt
OnJune 20, 2017 , we entered into a purchase agreement, or the Purchase Agreement, withWells Fargo Securities, LLC , as representative of the initial purchasers named therein, collectively, the Initial Purchasers, pursuant to which we agreed to issue and sell, and the Initial Purchasers agreed to purchase,$500 million aggregate principal amount of our 0.50% convertible senior notes due 2022, or the Notes, in a private placement transaction. Pursuant to the Purchase Agreement, we also granted the Initial Purchasers a 30-day option to purchase up to an additional$25 million aggregate principal amount of Notes, which was exercised in full onJune 21, 2017 . The net proceeds, after deducting the Initial Purchasers' discounts, were$514.5 million , which included proceeds from the Initial Purchasers' exercise of their option to purchase additional Notes. We received the net proceeds onJune 26, 2017 , which we used to repurchase shares of our common stock, retire our outstanding bank debt, and provide additional cash resources to fund the acquisition ofConexant Systems, LLC and the assets of Marvell Technology Group, Ltd.'s multimedia solutions business. 29 -------------------------------------------------------------------------------- The Notes bear interest at a rate of 0.50% per year. Interest has accrued sinceJune 26, 2017 and is payable semi-annually in arrears, onJune 15 andDecember 15 of each year, beginning onDecember 15, 2017 . The Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any our liabilities that are not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
The Notes mature on
Holders may convert all or any portion of their Notes, in multiples of$1,000 principal amounts, at their option at any time prior to the close of business on the business day immediately precedingMarch 15, 2022 under certain defined circumstances. On or afterMarch 15, 2022 until the close of business on the business day immediately preceding the Maturity Date, holders may convert all or any portion of their Notes, in multiples of$1,000 principal amounts, at the option of the holder. Upon conversion, we will pay or deliver, at our election, shares of common stock, cash, or a combination of cash and shares of common stock. The conversion rate for the Notes is initially 13.6947 shares of common stock per$1,000 principal amount of Notes (equivalent to an initial conversion price of approximately$73.02 per share of common stock). The conversion rate is subject to adjustment in certain circumstances. Upon the occurrence of a fundamental change (as defined in the Notes indenture), holders of the Notes may require us to repurchase for cash all or a portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. We may not redeem the Notes prior toJune 20, 2020 . We may redeem for cash all or any portion of the Notes, at our option, on or afterJune 20, 2020 , if the last reported sale price of our common stock, as determined by us, has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest up to, but excluding, the redemption date. Our policy is to settle the principal amount of our Notes with cash upon conversion or redemption. Bank Credit Facility. We have a$200.0 million revolving credit facility, which includes a$20 million sublimit for letters of credit and a$20 million sublimit for swingline loans. Under the terms of the revolving credit facility, or the Agreement, we may, subject to the satisfaction of certain conditions, request increases in the revolving credit facility commitments in an aggregate principal amount of up to$100 million to the extent existing or new lenders agree to provide such increased or additional commitments, as applicable. Proceeds under the revolving credit facility are available for working capital and general corporate purposes. As ofDecember 31, 2019 , there was no balance outstanding under the revolving credit facility. The revolving credit facility is required to be repaid in full on the earlier of (i)September 27, 2022 , and (ii) the date 91 days prior to the Maturity Date of the Notes if the Notes have not been refinanced in full by such date. Debt issuance costs of$2.3 million are amortizing over 60 months. Our obligations under the Agreement are guaranteed by the material domestic subsidiaries of our Company, subject to certain exceptions (such material subsidiaries, together with our Company, collectively, the Credit Parties). The obligations of the Credit Parties under the Agreement and the other loan documents delivered in connection therewith are secured by a first priority security interest in substantially all of the existing and future personal property of the Credit Parties, including, without limitation, 65% of the voting capital stock of certain of the Credit Parties' direct foreign subsidiaries, subject to certain exceptions. The revolving credit facility bears interest at our election of a Base Rate plus an Applicable Margin or LIBOR plus an Applicable Margin. Swingline loans bear interest at a Base Rate plus an Applicable Margin. The Base Rate is a floating rate that is the greater of the Prime Rate, the Federal Funds Rate plus 50 basis points, or LIBOR plus 100 basis points. The Applicable Margin is based on a sliding scale which ranges from 0.25 to 100 basis points for Base Rate loans and 100 basis points to 175 basis points for LIBOR loans. We are required to pay a commitment fee on any unused commitments under the Agreement which is determined on a leverage-based sliding scale ranging from 0.175% to 0.25% per annum. Interest and fees are payable on a quarterly basis. Under our credit facility, when the LIBOR index is discontinued, we will switch to a comparable or successor rate as approved by the Administrative Agent, which is currently anticipated to be the SOFR. 30 -------------------------------------------------------------------------------- Under the Agreement, there are various restrictive covenants, including three financial covenants which limit the consolidated total leverage ratio, or leverage ratio, the consolidated interest coverage ratio, or interest coverage ratio, a restriction which places a limit on the amount of capital expenditures that may be made in any fiscal year, a restriction that permits up to$50 million per fiscal quarter of accounts receivable financings, and sets the Specified Leverage Ratio. The leverage ratio is the ratio of debt as of the measurement date to earnings before interest, taxes, depreciation and amortization, or EBITDA, for the four consecutive quarters ending with the quarter of measurement. The current leverage ratio shall not exceed 3.50 to 1.00 provided that for the four fiscal quarters ending after the date of a material acquisition, such maximum leverage ratio shall be adjusted to 3.75 to 1.00, and thereafter, shall not be more than 3.50 to 1.00. The interest coverage ratio is EBITDA to interest expense for the four consecutive quarters ending with the quarter of measurement. The interest coverage ratio must not be less than 3.50 to 1.0 during the term of the Agreement. The Specified Leverage Ratio is the ratio used in determining, among other things, whether we are permitted to make dividends and/or prepay certain indebtedness, at a fixed ratio of 3.00 to 1.00.
Liquidity and Capital Resources. We believe our existing cash and cash equivalents, anticipated cash flows from operating activities, and available credit under our revolving credit facility will be sufficient to meet our working capital and other cash requirements, including our debt service obligations, for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue, the timing and extent of spending to support product development efforts, costs associated with restructuring activities net of projected savings from those activities, costs related to protecting our intellectual property, the expansion of sales and marketing activities, timing of introduction of new products and enhancements to existing products, costs to ensure access to adequate manufacturing, costs of maintaining sufficient space for our workforce, the continuing market acceptance of our product solutions, our common stock repurchase program, and the amount and timing of our investments in, or acquisitions of, other technologies or companies. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of business opportunities or to respond to competitive pressures could be limited or severely constrained. Based on our ability to access our cash and cash equivalents, our expected operating cash flows, and our other sources of cash, we do not anticipate the need to remit undistributed earnings of our foreign subsidiaries to meet our working capital and other cash requirements, but if we did remit such earnings, we may be required to accrue and pay certain state and foreign taxes to repatriate these funds, which would adversely impact our financial position and results of operations.
Contractual Obligations and Commercial Commitments
Our material contractual obligations and commercial commitments as of
Remaining
in Fiscal Fiscal Fiscal Fiscal Fiscal
Year 2020 Year 2021 Year 2022 Year 2023 Year 2024 Thereafter Total
Long-term debt (1) $ 1.3 $ 2.6 $ 527.6 $ - $ - $ - $ 531.5
Leases 4.7 8.6 5.8 3.8 2.5 1.8 27.2
Purchase
obligations and
other
commitments (2) 38.5 13.0 - - - - 51.5
Transition tax
payable (3) 0.9 0.9 0.9 1.8 2.4 3.0 9.9
Total $ 45.4 $ 25.1 $ 534.3 $ 5.6 $ 4.9 $ 4.8 $ 620.1 (1) Represents the principal and interest payable through the maturity date of
the underlying contractual obligation.
(2) Purchase obligations and other commitments include payments due for inventory
purchase obligations with contract manufacturers, long-term software tool
licenses, and other licenses.
(3) Represents the remaining balance of the one-time transition tax liability
associated with our deemed repatriation of accumulated foreign earnings as a
result of the enactment of the Tax Cuts and Jobs Act into law on
2017.
The amounts in the table above exclude unrecognized tax benefits of$20.8 million . As ofDecember 31, 2019 , we were unable to make a reasonably reliable estimate of when cash settlement with a taxing authority may occur in connection with our gross unrecognized tax benefit. 31
--------------------------------------------------------------------------------
© Edgar Online, source
