MACOM Technology Solutions Holdings, Inc. — Q1 FY2016 Form 10-Q
Business context and period: The quarter ended January 1, 2016; comparisons are to the three months ended January 2, 2015. MACOM designs and sells analog semiconductors and modules for Networks, Aerospace & Defense (A&D), and Multi-market applications. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $115.8 | $96.6 |
| Gross profit / margin | $60.3 / 52.1% | $47.4 / 49.1% |
| Operating income | $0.2 | $3.4 |
| Loss from continuing operations | ($16.8) | ($10.0) |
| Net loss / diluted loss per share | ($15.6) / ($0.29) | ($6.3) / ($0.13) |
| Cash from operating activities | $15.5 | ($12.5) |
| Cash used in investing activities | ($82.7) | ($212.5) |
- Revenue rose 19.9% year over year. Networks revenue increased 55.3% to $83.0 million; A&D declined 26.4% to $18.3 million; Multi-market declined 20.7% to $14.5 million.
- Gross margin improved 3.0 percentage points. Operating expenses rose to $60.2 million from $44.0 million, including higher R&D, SG&A, stock-based compensation and acquired-intangible amortization.
- Warrant fair-value expense was $14.9 million, versus $10.6 million a year earlier. This noncash charge contributed materially to the reported net loss; the warrant liability increased to $36.7 million from $21.8 million at fiscal year-end.
- Operating cash flow was positive despite the net loss, largely because of noncash charges; working-capital changes used $8.2 million. Investing outflows included $85.5 million for acquisitions and $6.2 million of capital expenditures.
Financial position and material changes
- At January 1, 2016, cash and cash equivalents were $47.8 million and short-term investments were $29.8 million, totaling $77.6 million. Cash alone fell $74.5 million from October 2, 2015, principally reflecting acquisitions.
- Reported debt was $346.6 million, including current and long-term portions; the term-loan principal was $344.8 million. The $130 million revolving facility had no borrowings. The term loans mature in May 2021; the effective rate was 4.5%. MACOM reported compliance with debt covenants.
- Current assets were $329.4 million versus current liabilities of $80.8 million. Inventory increased to $101.0 million from $79.9 million.
- December acquisitions: FiBest, an optical-subassembly supplier, for $59.1 million including $11.6 million of assumed debt; and Metelics, a diode supplier, for $38.0 million cash. Both were funded with cash on hand. Purchase-price allocations remained preliminary. The acquisitions contributed only partial-quarter results.
- Automotive was sold in August 2015. The quarter included $1.2 million of discontinued-operations income, including $1.9 million of consulting-agreement income before tax; potential earnout and other sale proceeds remain contingent.
Outlook, risks and unusual items
- Management expects Networks demand to benefit over time from communications infrastructure, optical links and cloud-related demand; A&D depends partly on government programs and funding. No specific revenue or earnings guidance is provided.
- Management stated that cash, short-term investments, expected operating cash generation and available revolver capacity should fund working-capital needs for at least the next 12 months. It also noted that additional capital might be needed and may not be available on favorable terms.
- MACOM expected a further $5–$7 million of restructuring costs during the remainder of calendar 2016 related to Metelics integration.
- Disclosure controls were deemed ineffective at quarter-end because of an ongoing material weakness in IT general controls concerning user access and program-change management. Management nevertheless stated that the financial statements fairly present the company’s position and results.
- Integration and realization of acquisition benefits, international operations and currency exposure, customer concentration, and demand fluctuations are key risks. Four customers each accounted for at least 10% of quarterly revenue; the top ten represented 64%.
- The prior-year cash-flow statement was restated to reclassify a $14.6 million BinOptics employee-retention escrow payment from investing to operating activities. Prior-year operating cash use is shown as restated.
- A former-employee lawsuit proceeds as an individual action and claims under California’s Private Attorneys’ General Act after class claims were dismissed by agreement; mediation was scheduled for Q2 FY2016.
Important facts for investors to verify
- Whether Networks growth persists and whether A&D and Multi-market demand stabilizes, considering the prior-year $12.4 million distributor-revenue estimate adjustment that affected comparability.
- Acquisition integration progress, final purchase-price allocations, restructuring spending and whether anticipated synergies materialize.
- Cash generation, inventory growth and liquidity after acquisition outlays; debt balances, interest-rate exposure and covenant headroom.
- Potential earnings volatility from the Level 3 warrant valuation and the status of remediation of the IT-control material weakness.
- Any developments in the employment litigation and contingent proceeds from the Automotive divestiture.