MaxLinear, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017; filed August 8, 2017. MaxLinear is a fabless semiconductor company serving connected-home, wired and wireless infrastructure, industrial, automotive and multi-market applications. The interim financial statements are unaudited and results are not necessarily indicative of the full year.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $104.2 million | $101.7 million | $193.0 million | $204.4 million |
| Gross profit | $51.1 million | $62.9 million | $104.0 million | $124.1 million |
| Gross margin | 49% | 62% | 54% | 61% |
| Operating income (loss) | $(15.8) million | $22.4 million | $(5.4) million | $44.1 million |
| Net income | $11.0 million | $22.6 million | $19.4 million | $43.3 million |
| Diluted EPS | $0.16 | $0.33 | $0.28 | $0.64 |
| Operating cash flow | Not separately provided | Not separately provided | $15.6 million | $71.3 million |
Revenue increased 2% year over year in the quarter but declined 6% for the first six months. Connected-home revenue declined 13% in Q2 and 17% year to date, primarily due to declines in legacy video SoCs and satellite analog channel-stacking products. Infrastructure revenue increased 67% in Q2 and 106% year to date, while industrial and multi-market revenue increased 478% and 290%, respectively, substantially reflecting acquired businesses.
Operating results were pressured by acquisition-related amortization, inventory fair-value step-up amortization, higher research and development and selling, general and administrative expenses, and $6.5 million of restructuring charges. The Q2 operating loss and six-month operating loss contrast with operating income of $22.4 million and $44.1 million, respectively, in the comparable 2016 periods.
Net income benefited from a $29.5 million Q2 and $27.5 million year-to-date income tax benefit, primarily from releasing $50.1 million of the U.S. federal deferred-tax valuation allowance. The company retained valuation allowances on California and certain foreign deferred tax assets. Accordingly, reported net income was materially higher than pre-tax results would otherwise suggest.
At June 30, 2017, cash and cash equivalents were $87.6 million, restricted cash was $2.5 million, and net accounts receivable were $82.7 million. Working capital was $148.0 million, compared with $158.3 million at December 31, 2016. Inventory increased to $77.6 million from $26.6 million, while investments declined from $53.9 million to zero.
Material transactions and changes versus the prior period
- MaxLinear completed the $688.1 million cash acquisition of Exar Corporation on May 12, 2017, funded with available cash, Exar cash and approximately $416.8 million of net term-loan proceeds. Exar contributed $13.9 million of revenue and $8.0 million of gross profit after acquisition, before acquired-intangible and inventory-step-up amortization.
- The company acquired Marvell’s G.hn business for $21.0 million on April 4, 2017.
- Acquisitions added $163.2 million of goodwill; total goodwill was $238.8 million at June 30, 2017. Net intangible assets rose to $353.5 million from $104.3 million at year-end 2016.
- New secured term debt had $425.0 million of principal outstanding, a $417.0 million carrying amount and a 3.8% effective interest rate. The loan matures May 12, 2024; quarterly amortization begins September 30, 2017. The company made optional prepayments totaling $30.0 million in July and August 2017.
- Six-month investing cash outflow was $426.6 million, primarily from the Exar and G.hn acquisitions. Financing cash inflow was $416.1 million, primarily from the new term loan. Cash, cash equivalents and restricted cash increased $7.2 million during the six months.
- Research and development expense increased 11% year to date to $52.9 million. Selling, general and administrative expense increased 66% to $50.0 million, including acquisition-related professional fees and amortization.
- The company released its federal valuation allowance, adopted certain accounting standards early, and expects to adopt the new revenue standard prospectively in 2018. Management expects the revenue-standard adoption to accelerate distributor revenue recognition but does not currently expect a material impact on 2018 revenue.
Outlook, commentary and risks
Management stated that cash and cash equivalents at June 30, 2017 should fund projected operating requirements for at least the next twelve months, but noted that additional capital or debt may be needed for strategic initiatives or further acquisitions. Management expects revenue declines in legacy video SoC and satellite analog channel-stacking products to continue, while research and development and selling, general and administrative expenses are expected to increase as the company expands its product portfolio and markets.
Management expects cost savings and synergies from Exar and believes recent acquisitions can be accretive to free cash flow and reported non-GAAP earnings per share, excluding non-recurring charges, transaction costs and purchased-intangible amortization. These expectations depend on successful integration, customer retention, revenue performance, cost savings and semiconductor-market conditions.
- Leverage and liquidity risk increased materially following the Exar acquisition; the term loan is secured by substantially all assets of the company and certain subsidiaries and bears variable interest rates. A 100-basis-point rate increase would increase quarterly interest expense by approximately $1.1 million.
- Customer concentration remains significant: Arris represented 26% of Q2 revenue and 29% of six-month revenue; the ten largest customers represented 61% and 64%, respectively. Asia accounted for 93% of six-month revenue and China for 75%.
- Acquisition accounting produced substantial goodwill, intangible assets and amortization expense, creating impairment risk and making year-over-year comparisons less comparable.
- Contractual obligations totaled $114.0 million, including $39.7 million of inventory purchase obligations, $50.6 million of operating leases and $23.7 million of other obligations, excluding term-loan principal payments.
- Pending matters include CrestaTech patent litigation and appeals, Trango Systems litigation, and Exar shareholder litigation. The company cannot predict outcomes; adverse determinations could materially affect results.
- Other significant risks include semiconductor cyclicality, product obsolescence and pricing pressure, distributor inventory and price-protection exposure, reliance on third-party foundries and assembly providers, supply disruptions, international operations, tax uncertainty and cybersecurity risks.
Investor verification points
- Verify the sustainability of reported net income after excluding the $29.5 million Q2 tax benefit and other acquisition-related and restructuring items.
- Track Exar integration progress, realized synergies, customer retention, revenue contribution and final purchase-price allocation.
- Monitor gross-margin recovery as inventory step-up amortization and acquired-intangible amortization continue.
- Assess debt repayment capacity, variable-rate exposure, covenant restrictions and the effect of the $30.0 million subsequent prepayment.
- Evaluate inventory growth, distributor inventories, price-protection liabilities and working-capital conversion.
- Monitor the decline of legacy connected-home products and the scalability of infrastructure and industrial/multi-market growth.
- Review developments in CrestaTech, Trango and Exar shareholder litigation, including potential settlement costs or damages.