Semtech Corporation (10-Q) — Fiscal 2019 First Quarter
Reporting period: Three months ended April 29, 2018, compared with the three months ended April 30, 2017. Semtech supplies analog and mixed-signal semiconductors. Its three operating segments were combined into one reportable segment, the Semiconductor Products Group.
Financial results
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $130.4 million | $143.8 million |
| Gross profit / gross margin | $71.5 million / 54.8% | $84.9 million / 59.0% |
| Operating income (loss) | $(3.1) million | $18.3 million |
| Income (loss) before taxes | $(5.1) million | $15.6 million |
| Income tax benefit (expense) | $17.5 million benefit | $(3.8) million expense |
| Net income | $12.4 million | $11.8 million |
| Diluted EPS | $0.18 | $0.18 |
| Cash provided by operating activities | $35.0 million | $10.4 million |
Cash and cash equivalents were $303.3 million at quarter-end. Debt was $222.9 million net of debt discount, comprising $127.5 million of term loans and $97.0 million drawn on the revolver; $153.0 million of revolving capacity remained undrawn. The company reported compliance with its credit covenants. Gross margin declined 4.2 percentage points year over year.
Changes and unusual items
- Sales declined 9% year over year. The company said the April 2018 acceleration of the remaining Comcast warrant vesting reduced Q1 sales and gross profit by $15.9 million; total warrant-related revenue offset was $21.5 million. The warrant is fully vested, with no further costs expected.
- Semtech adopted ASC 606 in Q1. Compared with prior revenue guidance, adoption increased reported sales by $4.5 million, net income by $2.7 million and diluted EPS by $0.04; deferred revenue decreased by $15.7 million. Prior-period figures were not restated.
- Net income despite a pretax loss reflected a $17.5 million tax benefit, including a $15.8 million benefit from a partial release of the valuation allowance on U.S. deferred tax assets following analysis of tax-reform provisions.
- Share-based compensation was $35.5 million versus $13.3 million a year earlier, including the warrant revenue offset and costs related to award modifications and remeasurement. SG&A rose 22% to $41.4 million.
- Operating cash flow improved year over year, supported in part by lower inventory spending; it was partly offset by $13.4 million of supplemental compensation payments.
Outlook, liquidity and risks
- Management forecast Q2 FY2019 net sales of $155 million to $167 million and gross margin of 60.8% to 61.8%. It cited recent bookings and opening backlog; these are forward-looking estimates, not assurances.
- Management said available financial resources should meet business requirements for the next 12 months. Approximately $246.7 million of cash was held by foreign subsidiaries. The company expects to remit approximately $240 million of foreign earnings and intends to permanently reinvest other unremitted earnings.
- On May 24, 2018, the board increased the share repurchase authorization by $250 million, to $271.7 million. Q1 repurchases totaled $25.3 million. On May 2, 2018, Semtech acquired IC Interconnect for approximately $7 million.
- Potential risks include customer and distributor concentration, reliance on limited suppliers and foreign manufacturing, demand and order volatility, variable-rate debt, foreign exchange exposure, and competition. Two distributors each represented 12% of Q1 sales; China, including Hong Kong, represented 50% of sales.
- For ongoing groundwater and soil remediation at a former California facility, the company estimated probable losses of $4.1 million to $7.2 million and accrued the $4.1 million minimum. Management did not expect current legal matters, individually or collectively, to materially affect the financial statements, but noted litigation outcomes remain uncertain.
Key facts for investors to verify
- How much of the reported sales decline and margin compression reflects the one-time Comcast warrant acceleration, and how ASC 606 affects comparisons with prior periods.
- Whether Q2 sales and gross-margin guidance is achieved, and how demand develops in LoRa and other product lines.
- The sustainability of operating cash flow and the effects of share-based compensation, repurchases, acquisition spending and earn-out payments on liquidity.
- Tax-reform estimates, the planned foreign-earnings remittance and any changes in uncertain tax positions.
- Changes in customer or supplier concentration, remediation estimates and other legal or contingent liabilities.