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SYNAPTICS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements and Factors That May Affect Results This Quarterly Report on Form 10-Q for the quarter ended September 27, 2014 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 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, 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 ended June 28, 2014, and other risks as identified from time to time in our Securities and Exchange Commission 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. Overview We are a leading worldwide developer and supplier of custom-designed human interface solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing, communications, entertainment, and other electronic devices. We believe our results to date reflect the combination of our customer focus, the strength of our intellectual property, and our engineering know-how, which allow us to develop or engineer products that meet the demanding design specifications of OEMs. Many of our customers have manufacturing operations in China, and many of our OEM customers have established design centers in that region. With our expanded global presence, including offices in China, Finland, Hong Kong, India, Japan, Korea, Switzerland, Taiwan, and the 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, reducing 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 foundries 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 do not have any long-term supply contracts with any of our contract manufacturers. We use two third-party semiconductor wafer manufacturers to supply us with silicon wafers integrating our proprietary design specifications. The completed silicon wafers are forwarded to third-party package and test processors for further processing into die and packaged ASICs, as applicable, which are then utilized in our custom interface products or processed as our ASIC-based solutions. 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, manufacturing, assembly, and test costs paid to third-party manufacturers, and related overhead costs associated with our indirect manufacturing operations personnel. Additionally, 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. Our gross margin generally reflects the combination of the added value we bring to our OEM customers' products in 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. 19 -------------------------------------------------------------------------------- Table of Contents 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 their commitment to incorporate those solutions into their products. These expenses have generally increased, reflecting our continuing commitment 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. These expenses have generally increased, primarily reflecting incremental staffing and related support costs associated with our business acquisitions, increased business levels, growth in our existing markets, and penetration into new markets. Change in contingent consideration is a cost associated with the acquisition of a business in which an earn-out arrangement is entered into between us and a selling party. We entered into earn-out arrangements in connection with our acquisitions of both Pacinian and Validity. The earn-out arrangements were designed to deliver more purchase price consideration to the selling parties, provided the acquired business delivers on the negotiated earn-out terms. Under these earn-out arrangements, upon satisfaction of certain financial metrics and other conditions, additional cash will be delivered to the former Pacinian stockholders and additional cash and shares of our common stock will be delivered to the former Validity stockholders. Accordingly, we anticipate that changes in the fair value of the contingent consideration in future accounting periods could result in volatility in our operating results due to changes in our estimates of the timing and the number of qualifying units expected to be sold during the earn-out period, the degree of success of current and future projects incorporating both the developed technology and in-process technology of Pacinian and/or Validity, and changes in the discount rates used to determine the fair value of the contingent consideration liabilities over time. Acquisition Activity On June 11, 2014, we entered into a stock purchase agreement to acquire Renesas SP Drivers, Inc., or RSP, a leading provider of small and medium-sized display driver integrated circuits for smartphones and tablets. The Acquisition of RSP is intended to accelerate our product roadmap for high-performance, low-cost display integration products, strengthen our relationships with key customers, and create opportunities to drive increased revenue. Effective as of the Closing Date, we completed the Acquisition for a purchase price of approximately ¥50.6 billion (or approximately $463 million), with Japanese yen converted into US dollars at a reference conversion rate of 109.4 JPY to USD. The purchase price at the closing of the Acquisition was paid entirely in cash, with ¥7.25 billion (or approximately $66 million) held back until the date that is 18 months after the Closing Date to address any post-closing adjustments or claims, and ¥5.25 billion (or approximately $48 million) held back in respect of a potential post-closing working capital, cash balance, indebtedness and transaction expenses adjustment. Under the stock purchase agreement, RSP entered into an inventory purchase obligation with Renesas Electronics Corporation, or REL, to acquire the closing date inventory held by REL at the target amount of ¥12.53 billion (or approximately $115 million). The inventory purchase obligation is expected to be settled in fiscal 2015. In connection with the Acquisition, on September 30, 2014, we entered into the Credit Agreement, with the lenders party thereto, or the Lenders, and Wells Fargo Bank, National Association, or Wells Fargo, as administrative agent for the Lenders. The Credit Agreement provides for, among other things, (i) a revolving credit facility of up to $150 million, which includes a $20 million sublimit for letters of credit and a $20 million sublimit for swingline loans, and (ii) a term loan facility in an amount of $150 million. Under the terms of the Credit Agreement, we may, subject to the satisfaction of certain conditions, request increases in the revolving credit facility commitments and additional term loan 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. We borrowed $150 million under the term loan facility and $100 million under the revolving credit facility to finance a portion of the Acquisition purchase price. The debt issuance costs were approximately $5.0 million. Our obligations under the Credit Agreement are guaranteed by the material domestic subsidiaries of our company, subject to certain exceptions (such material subsidiaries, together with our company, collectively, the Credit Parties). The obligations of the Credit Parties under the Credit Agreement and the other loan documents delivered in connection therewith are secured by a first priority security interest in substantially all of the existing and future personal property of the Credit Parties, including, without limitation, 65% of the voting capital stock of certain of the Credit Parties' direct foreign subsidiaries, subject to certain exceptions. 20-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates There have been no significant changes in our critical accounting policies and estimates during the three months ended September 27, 2014 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 28, 2014. 21-------------------------------------------------------------------------------- Table of Contents 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 thousands, except percentages): Three Months Ended September 30, 2014 (1) 2013 $ Change % Change Mobile product applications $ 199,734 $ 162,664 $ 37,070 22.8 % PC product applications 83,007 59,943 23,064 38.5 % Net revenue 282,741 222,607 60,134 27.0 % Gross margin 120,189 109,279 10,910 10.0 % Operating expenses: Research and development 57,525 40,442 17,083 42.2 % Selling, general, and administrative 30,673 21,124 9,549 45.2 % Acquired intangibles amortization 262 262 - 0.0 % Change in contingent consideration (4,502 ) 258 (4,760 ) (1845.0 %) Operating income 36,231 47,193 (10,962 ) (23.2 %) Interest income, net 624 426 198 46.5 % Income before provision for income taxes 36,855 47,619 (10,764 ) (22.6 %) Provision for income taxes 10,269 12,680 (2,411 ) (19.0 %) Net income $ 26,586 $ 34,939 $ (8,353 ) (23.9 %) (1) Includes the results of operations from Validity, which was acquired on November 7, 2013 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: Three Months Ended Point September 30, Increase/ 2014 (1) 2013 (Decrease) Mobile product applications 70.6 % 73.1 % (2.5 %) PC product applications 29.4 % 26.9 % 2.5 % Net revenue 100.0 % 100.0 % Gross margin 42.5 % 49.1 % (6.6 %) Operating expenses: Research and development 20.3 % 18.2 % 2.1 % Selling, general, and administrative 10.8 % 9.5 % 1.3 % Acquired intangibles amortization 0.1 % 0.1 % 0.0 % Change in contingent consideration (1.6 %) 0.1 % (1.7 %) Operating income 12.8 % 21.2 % (8.4 %) Income before provision for income taxes 13.0 % 21.4 % (8.4 %) Provision for income taxes 3.6 % 5.7 % (2.1 %) Net income 9.4 % 15.7 % (6.3 %) (1) Includes the results of operations from Validity, which was acquired on November 7, 2013 22 -------------------------------------------------------------------------------- Table of Contents Net Revenue Net revenue was $282.7 million for the quarter ended September 30, 2014 compared with $222.6 million for the quarter ended September 30, 2013, an increase of $60.1 million, or 27.0%. Of our first quarter fiscal 2015 net revenue, $199.7 million, or 70.6%, was from mobile product applications and $83.0 million, or 29.4%, was from PC product applications. The increase in net revenue for the quarter ended September 30, 2014 was attributable to an increase in net revenue from both mobile and PC product applications. Net revenue from mobile product applications increased primarily as a result of higher unit sales in the quarter, reflecting market growth and the addition of mobile based biometric fingerprint authentication solutions. Net revenue from PC product applications increased primarily as a result of higher unit sales in the quarter and the addition of PC-based biometric fingerprint authentication solutions. Based on industry estimates of unit shipments, the smartphone market is anticipated to increase approximately 24%, the tablet market is anticipated to increase approximately 7%, and the notebook market is anticipated to decrease approximately 2% in calendar year 2014 compared with calendar year 2013. Gross Margin Gross margin as a percentage of net revenue was 42.5%, or $120.2 million, for the quarter ended September 30, 2014 compared with 49.1%, or $109.3 million, for the quarter ended September 30, 2013. The 660 basis point decline in gross margin was primarily due to amortization of acquired intangibles recognized in the current quarter, as well as a higher mix of module products, which generally carry a lower margin than chip products due to additional components/materials which are included with the chip. We continuously introduce new product solutions, many of which have life cycles of less than a year. Further, as we sell our capacitive sensing technology 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 impacted materially by our shipment volume. We charge losses on inventory purchase obligations and write-down to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value (including warranty costs) to cost of revenue. In connection with our acquisition of RSP, we will have additional amortization charges of acquired intangible assets, which will be recorded to cost of revenue. These additional charges will cause our future gross margins to decline for the remainder of fiscal 2015. Operating Expenses Research and Development Expenses. Research and development expenses increased $17.1 million to $57.5 million for the quarter ended September 30, 2014 compared with the quarter ended September 30, 2013. The increase in research and development expenses primarily reflected an $11.0 million increase in personnel-related costs, which included our annual merit increase, additional headcount associated with an expanded product portfolio and our acquisition of Validity in November 2013, a $4.6 million increase in infrastructure-related costs, and a $1.5 million increase in share-based compensation costs. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $9.5 million to $30.7 million for the quarter ended September 30, 2014 compared with the quarter ended September 30, 2013. The increase in selling, general, and administrative expenses primarily reflected a $6.4 million increase in personnel-related costs, which included our annual merit increase, additional headcount related to our expanded sales force and our acquisition of Validity in November 2013, a $2.2 million increase in infrastructure-related costs, and a $0.9 million increase in share-based compensation costs. Change in Contingent Consideration. Our contingent consideration decreased $4.8 million to a credit of $4.5 million for the quarter ended September 30, 2014 compared with the quarter ended September 30, 2013. The change was primarily attributable to the decrease in the estimated fair value of the contingent consideration, which resulted from an adjustment in expected unit sales of products embodying Validity fingerprint sensor technology and/or Pacinian ThinTouch technology over the remaining earn-out periods. 23-------------------------------------------------------------------------------- Table of Contents Provision for Income Taxes The provision for income taxes of $10.3 million and $12.7 million for the three months ended September 30, 2014 and 2013, respectively, represented estimated federal, foreign, and state income taxes. 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 income taxes, excluding the effects of significant unusual or infrequently occurring discrete items and the change in contingent consideration liability which is not yet reliably estimable. The tax effects of discrete items and the change in contingent consideration liability are recorded in the same period that the related item is reported and resulted in the difference between the actual effective tax rate for the three months ended September 30, 2014 and 2013, and the estimated annual effective tax rates for those same periods of 32.6% and 27.3%, respectively. Our annual effective tax rate diverged from the combined U.S. federal and state statutory rate primarily because of foreign income taxed at lower tax rates, partially offset by foreign withholding taxes, nondeductible amortization, and net unrecognized tax benefits associated with qualified stock options. Discrete items recognized in the three months ended September 30, 2014 included additional penalty and interest related to uncertain tax positions related to prior fiscal years and tax benefits realized from share-based compensation. Discrete items recognized in the three months ended September 30, 2013 included additional penalty and interest related to uncertain tax position related to prior fiscal years and tax benefits realized from share-based compensation. In May 2011, we were notified by the Internal Revenue Service, or the Service, that our fiscal 2003 through 2006 and fiscal 2008 through 2010 returns would be subject to examination. In March 2013, we received the Revenue Agent's Report resolving our examination with the Service and paid an assessment that had no material impact on our condensed consolidated financial statements. Our case is pending review by the Joint Committee on Taxation, which we anticipate will conclude in our fiscal 2015. Any prospective adjustments to our unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and may cause a corresponding change to our effective tax rate. Accordingly, our effective tax rate could fluctuate materially from period to period. Liquidity and Capital Resources Our cash and cash equivalents were $449.8 million as of September 30, 2014 compared with $447.2 million as of June 30, 2014, an increase of $2.6 million. The increase primarily reflected the combination of $60.4 million provided by operating cash flows and $8.6 million of proceeds from the issuance of shares of our common stock under our employee equity programs, partially offset by $50.0 million used to repurchase 628,530 shares of our common stock, and $19.6 million used for the purchase of property and equipment. We consider earnings of our foreign subsidiaries indefinitely invested overseas and have made no provision for income or withholding taxes that may result from a future repatriation of those earnings. As of September 30, 2014, $316.0 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we would be required to accrue and pay U.S. federal, foreign, and state taxes to repatriate these funds. Cash Flows from Operating Activities. Operating activities during the three months ended September 30, 2014 generated net cash of $60.4 million compared with $28.9 million of net cash generated during the three months ended September 30, 2013. For the three months ended September 30, 2014, net cash provided by operating activities was primarily attributable to net income of $26.6 million, plus adjustments for non-cash charges of $13.3 million, and a $20.6 million net change in operating assets and liabilities. The net change in operating assets and liabilities was primarily attributable to a $16.3 million increase in other accrued liabilities, a $5.9 million decrease in inventory, a $5.2 million increase in accounts payable, a $3.9 million decrease in other assets, partially offset by a $9.6 million decrease in accrued compensation and a $1.4 million increase in prepaid expenses and other current assets. From June 30, 2014 to September 30, 2014, our days sales outstanding increased from 56 days to 62 days and our inventory turns increased from 6 to 8. Cash Flows from Investing Activities. Investing activities during the three months ended September 30, 2014 used net cash of $19.6 million for purchases of property and equipment, partially offset by $1.4 million of proceeds for the sale of non-current investments, compared with $10.0 million net cash used for purchases of property and equipment during the three months ended September 30, 2013. Cash Flows from Financing Activities. Net cash used in financing activities for the three months ended September 30, 2014, was $39.6 million compared with $42.6 million of net cash used during the three months ended September 30, 2013. Net cash used in financing activities for the three months ended September 30, 2014 primarily included $50.0 million used to repurchase 628,530 shares of our common stock, partially offset by $8.6 million in proceeds from issuance of shares of our common stock under our employee equity programs. 24-------------------------------------------------------------------------------- Table of Contents Common Stock Repurchase Program. Our board has cumulatively authorized $730.0 million for our common stock repurchase program, expiring in July 2016. 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 is based on the level of our cash balances, general business and market conditions, and other factors, including alternative investment opportunities. Common stock purchased under this program is held as treasury stock. From April 2005 through September 30, 2014, we purchased 19,676,241 shares of our common stock in the open market for an aggregate cost of $580.4 million. Treasury shares purchased prior to August 28, 2008 were not subject to the stock split on that date. During the three months ended September 30, 2014, we repurchased 628,530 shares of our common stock for a total cost of 50.0 million, leaving $149.6 million remaining under our common stock repurchase program. Bank Credit Facility. In connection with the Acquisition, on September 30, 2014, we entered into the Credit Agreement, with the Lenders, and Wells Fargo, as administrative agent for the Lenders. The Credit Agreement provides for, among other things, (i) a revolving credit facility of up to $150 million, which includes a $20 million sublimit for letters of credit and a $20 million sublimit for swingline loans, and (ii) a term loan facility in an amount of $150 million. Under the terms of the Credit Agreement, we may, subject to the satisfaction of certain conditions, request increases in the revolving credit facility commitments and additional term loan 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. We borrowed $150 million under the term loan facility and $100 million under the revolving credit facility to finance a portion of the Acquisition purchase price. Our obligations under the Credit Agreement are guaranteed by the material domestic subsidiaries of our company, subject to certain exceptions (such material subsidiaries, together with our company, collectively, the Credit Parties). The obligations of the Credit Parties under the Credit Agreement and the other loan documents delivered in connection therewith are secured by a first priority security interest in substantially all of the existing and future personal property of the Credit Parties, including, without limitation, 65% of the voting capital stock of certain of the Credit Parties' direct foreign subsidiaries, subject to certain exceptions. The revolving credit facility and term loans bear interest at our election of a Base Rate plus an applicable margin or LIBOR plus an applicable margin. Swingline loans bear interest at a Base Rate plus an applicable margin. The Base Rate is the greater of the Prime Rate, the Federal Funds Rate plus 50 basis points, or LIBOR plus 100 basis points. The applicable margin is based on a sliding scale which ranges from zero to 100 basis points for Base Rate loans and 100 basis points to 200 basis points for LIBOR loans. The term loan facility requires repayment over five years with nineteen quarterly payments beginning in our quarter ending in March 2015. Each of the first four quarterly principal payments is $1.9 million, and each of the next fourteen quarterly principal payments is $3.8 million, followed by a final principal payment of $90.0 million on September 30, 2019. The revolving credit facility requires payment in full at the end of five years on September 30, 2019. Interest on the term loan facility and revolving credit facility is payable quarterly. Under the Credit Agreement, there are various restrictive covenants, including three financial covenants which limit; the consolidated total leverage ratio, or leverage ratio; the consolidated interest coverage ratio, or interest coverage ratio; and places a restriction on the amount of capital expenditures that may be made in any fiscal year. The leverage ratio is the ratio of debt as of the measurement date to earnings before interest, taxes, depreciation and amortization, or EBITDA, for the four consecutive quarters ending with the quarter of measurement. The leverage ratio must not exceed 2.50 to 1.0 during the first two years of the agreement, and 2.0 to 1.0 during the last three years of the agreement. The interest coverage ratio is EBITDA to interest expense for the four consecutive quarters ending with the quarter of measurement. The interest coverage ratio must not be less than 3.50 to 1.0 during the term of the agreement. $100 Million Shelf Registration. We have registered an aggregate of $100.0 million of common stock and preferred stock for issuance in connection with acquisitions, which shares will generally be freely tradeable after their issuance under Rule 145 of the Securities Act unless held by an affiliate of the acquired company, in which case such shares will be subject to the volume and manner of sale restrictions of Rule 144. 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 for at least the next 12 months, including our contingent consideration obligations associated with the acquisitions of Validity and Pacinian, the anticipated settlement of the working capital holdback in connection with our acquisition of RSP, and the inventory purchase obligation with Renesas Electronics Corporation. Our future capital requirements will depend on many factors, including our revenue, the timing and extent of spending to support product development efforts, costs related to protecting our intellectual property, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, the costs of maintaining sufficient space or renovating recently acquired building space for our expanding 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. 25 -------------------------------------------------------------------------------- Table of Contents Our non-current investments consist of ARS investments, which have failed to settle in auctions. These investments are not liquid, and in the event we need to access these funds, we will not be able to do so without a loss of principal, unless redeemed by the issuers or a future auction on these investments is successful. 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 that the lack of liquidity on these investments will affect our ability to operate our business as usual. Further, we do not anticipate the need to repatriate any undistributed earnings of our foreign subsidiaries to meet our working capital and other cash requirements. Contractual Obligations and Commercial Commitments Our material contractual obligations and commercial commitments as of September 30, 2014 were as follows (in millions): Remaining Fiscal Fiscal Fiscal Fiscal in Fiscal Year Year Year Year Year 2015 2016 2017 2018 2019 Thereafter Total Leases $ 4 $ 5 $ 4 $ 2 $ 1 $ 1 $ 17 Purchase obligations and other commitments (1) 45 64 - - - - 109 Total $ 49 $ 69 $ 4 $ 2 $ 1 $ 1 $ 126 (1) Purchase obligations and other commitments include payments due for contingent consideration, a long-term services agreement and inventory purchase obligations with contract manufacturers. In connection with the acquisition of Validity in November 2013, we entered into a contingent consideration arrangement. As of September 30, 2014, we may be required to make additional cash payments of up to $145.8 million as consideration to the former Validity stockholders and option holders based on unit sales of products utilizing Validity technology through March 2016. The estimated fair value of the contingent consideration liability as of September 30, 2014 was $82.0 million. In connection with the acquisition of Pacinian in June 2012, we entered into a contingent consideration arrangement and subsequently paid $5.0 million of additional consideration to the former Pacinian stockholders upon customer acceptance of a ThinTouch product. As of September 30, 2014, we may be required to make additional cash payments of up to $10.0 million as consideration to the former Pacinian stockholders based on unit sales of products utilizing ThinTouch technology through June 2016. The estimated fair value of the contingent consideration liability as of September 30, 2014 was $3.4 million. The amounts in the table above exclude unrecognized tax benefits of $10.4 million. As of September 30, 2014, 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. Effective as of October 1, 2014, we completed the acquisition of RSP for a purchase price of approximately ¥50.6 billion (or approximately $463 million), with Japanese yen converted into U.S. dollars at a reference conversion rate of 109.4 JPY to USD. The purchase price at the closing of the acquisition was paid entirely in cash, with ¥7.25 billion (or approximately $66 million) held back to address any post-closing adjustments or claims, or the Indemnification Holdback, and ¥5.25 billion (or approximately $48 million) held back with respect of a potential post-closing working capital, cash balance, indebtedness and transaction expenses adjustment, or the Working Capital Holdback. We anticipate settlement of the Indemnification Holdback to occur 18 months from the close date and settlement of the Working Capital Holdback to occur in fiscal 2015. Further, under the stock purchase agreement, RSP entered into an inventory purchase obligation with REL to acquire closing date inventory at the target amount of ¥12.53 billion (or approximately $115 million). The inventory purchase obligation is expected to be settled in fiscal 2015. 26-------------------------------------------------------------------------------- Table of Contents Recently Issued Accounting Pronouncements Not Yet Effective In May 2014, the FASB issued an accounting standards update on Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard will replace most existing revenue recognition guidance in U.S. GAAP when the new standard becomes effective. The new standard is effective for us in our fiscal 2018. Early application is not permitted. We are evaluating the effect the new standard will have on our consolidated financial statements and related disclosures. The new standard permits the use of either the retrospective or cumulative effect transition method. We have not yet selected a transition method or determined the effect of the standard on our ongoing financial reporting. |