MACOM Technology Solutions Holdings, Inc. — Q3 FY2016 Form 10-Q
Reporting period: The quarter and nine months ended July 1, 2016; comparative periods ended July 3, 2015. Amounts are in U.S. dollars.
Business context and reporting period
MACOM designs and sells analog semiconductor products and modules for Networks, Aerospace and Defense (A&D), and Multi-market applications. It reports one operating segment. Results include FiBest and Metelics, acquired in December 2015, from their acquisition dates; MACOM sold its Automotive business in August 2015 and reports it as discontinued operations.
Key financial metrics
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $142.3 million | $109.1 million | $391.6 million | $308.0 million |
| Gross profit / margin | $74.0 million / 52.0% | $52.5 million / 48.1% | $199.8 million / 51.0% | $146.6 million / 47.6% |
| Operating income | $10.2 million | $4.4 million | $3.2 million | $5.4 million |
| Continuing operations income (loss) | $21.4 million | $1.8 million | $(7.5) million | $(19.4) million |
| Net income (loss) | $22.6 million | $8.0 million | $(3.7) million | $(5.8) million |
| Diluted EPS | $0.13 | $0.14 | $(0.07) | $(0.12) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $54.3 million | $28.2 million |
At July 1, 2016, cash and cash equivalents were $66.8 million and short-term investments were $23.7 million. Term-loan principal was $343.0 million; there were no revolving-credit borrowings, and the $130 million revolving facility remained available. The term loans’ effective interest rate was 4.5%. Management said available cash, investments, operating cash flow and borrowing capacity should cover working-capital needs for at least 12 months.
Material changes versus prior periods
- Quarterly revenue rose 30.5%; nine-month revenue rose 27.1%. Networks revenue increased 41.2% for the quarter and 45.9% year to date, led by acquired businesses and optical-related products. A&D revenue declined 10.8% and 15.7%, respectively; Multi-market revenue increased 33.3% and 9.1%.
- Quarterly gross margin improved 3.9 percentage points; nine-month gross margin improved 3.4 points. Management cited product mix, acquired-business revenue and lower acquisition inventory step-up costs, partly offset by higher amortization and product-line exit charges.
- Revenue growth includes acquired operations and is not solely organic. Comparisons are also affected by a $17.5 million distribution revenue-recognition estimate adjustment recorded in the prior-year nine-month period.
- Nine-month operating income was lower despite higher revenue, reflecting $11.8 million of impairment charges, increased R&D and SG&A, and other acquisition-related costs. R&D was $77.6 million and SG&A was $105.2 million for the nine months.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance was provided. Management described long-term demand drivers including communications-network upgrades, optical links, defense-system modernization and diverse catalog-product applications; it cautioned that market demand and government programs can vary.
- Operating cash flow improved year over year, but inventory absorbed $25.1 million during the nine months; management said the inventory build was intended to support anticipated demand in the remainder of FY2016. Investing cash outflow was $91.2 million, including $85.5 million for acquisitions and $24.1 million of capital expenditures. Cash declined $55.5 million from the fiscal-year start.
- MACOM expects an additional $3 million to $5 million of restructuring costs during the remainder of calendar 2016, primarily related to Metelics. It recorded $13.8 million of charges associated with exiting GaN-on-Silicon Carbide programs, including $10.1 million of intangible impairment; related charges also included fixed assets, contractual commitments and inventory.
- Quarterly results included a $15.3 million gain from remeasurement of the common-stock warrant liability; the nine-month period included a $3.7 million expense. These noncash fair-value changes materially affect reported earnings. The warrant liability was $25.6 million at quarter-end.
- The Automotive sale included $18 million payable after 18 months subject to contingencies, potential earnout payments up to $30 million through 2019, and a consulting arrangement that could provide up to $15 million. Future contingent proceeds are recognized when realizable.
- MACOM and its subsidiary sued Infineon over GaN-related patent agreements, seeking damages and other relief, including assignment of certain patents and an injunction. The outcome and financial effect are uncertain. The filing also flags export-control exposure involving large Chinese telecommunications customers and dependence on international operations and suppliers.
- Disclosure controls and procedures were deemed ineffective at July 1, 2016 because of an ongoing material weakness in IT general controls relating to user access and program change management. Remediation and effectiveness testing were still in progress.
Important facts for investors to verify
- How much of reported growth reflects acquired revenue versus organic demand, particularly in Networks, and whether A&D weakness persists.
- Whether the inventory build converts into sales and cash, and whether gross-margin improvement is sustainable after acquisition and product-exit effects.
- The impact of warrant-liability remeasurement on earnings and diluted EPS, which differs sharply from basic EPS in the quarter.
- Final purchase-price allocations for FiBest and Metelics, expected restructuring costs, and any further impairment or integration charges.
- Progress in remediating the material weakness, and developments in the Infineon litigation and export restrictions affecting major customers.