Semtech Corporation (NASDAQ: SMTC) — FY2019 Form 10-K
Reporting period: Fiscal year ended January 27, 2019 (52 weeks); comparison is with fiscal 2018 ended January 28, 2018. This is an annual filing, not a standalone calendar-quarter report.
Business context
Semtech designs high-performance analog and mixed-signal semiconductors and related algorithms, selling primarily to enterprise computing, industrial, high-end consumer and communications markets. Its three product lines are Signal Integrity, Protection, and Wireless and Sensing. The company uses a largely outsourced manufacturing model and sells 68% of products through distributors.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $627.2 million | $587.8 million |
| Gross profit / margin | $377.0 million / 60.1% | $352.0 million / 59.9% |
| Operating income | $98.5 million | $68.7 million |
| Net income | $63.1 million | $36.4 million |
| Diluted EPS | $0.92 | $0.54 |
| Cash from operations | $183.6 million | $111.5 million |
- Sales increased 7%. Industrial sales grew 20%, supported by LoRa technology; enterprise computing grew 5%. High-end consumer declined 1% and communications grew 5%.
- By product line, Signal Integrity sales were $276.0 million, Wireless and Sensing $190.6 million, and Protection $182.1 million. These totals include a $21.5 million reduction to revenue for the Comcast warrant.
- Operating income improved despite higher operating expenses. Gross margin edged up, helped by favorable industrial product mix.
- FY2019 cash from investing activities was negative $36.2 million, including $17.1 million of capital expenditures and $15.9 million for acquisitions, net of acquired cash. Cash used in financing was $143.1 million, including $116.2 million of share repurchases.
- At year-end, cash and equivalents were $312.1 million; total debt was $212.3 million, implying approximately $99.8 million of net cash. Working capital was $355.4 million. The revolver had $153.0 million of unused capacity.
- Reported income tax benefit was $0.1 million, versus a $23.2 million provision in FY2018. The effective tax rate was approximately negative 0.1%, versus 38.9%.
Quarterly context and material changes
In the quarter ended January 27, 2019, sales were $160.0 million, gross profit $98.9 million, operating income $26.8 million, and net income $13.3 million (diluted EPS $0.20). The comparable quarter ended January 28, 2018 had sales of $140.6 million, operating income of $14.0 million, and a net loss of $1.3 million.
- Cash from operations increased 64.7% year over year. The company cited improved results and noncash adjustments, including share-based compensation and a $30.0 million investment impairment.
- FY2019 included a $30.0 million noncash impairment of the entire Multiphy investment; Multiphy began winding down operations. FY2018 included a separate $4.3 million investment impairment.
- Operating expenses benefited from a $9.4 million reduction in contingent earn-out fair value expense, compared with $3.9 million of expense in FY2018. The FY2019 change was primarily related to AptoVision earn-out estimates.
- FY2019 SG&A included an $8.0 million recovery from the HiLight lawsuit settlement. The company said it was to receive approximately $9.0 million in total.
- Adoption of ASC 606 increased FY2019 sales by $9.8 million and net income by $6.0 million versus the prior revenue accounting guidance; comparative periods were not restated.
- The company repurchased $116.2 million of shares in FY2019, compared with $14.8 million in FY2018. It paid no cash dividends.
Outlook, risks and contingencies
- Management forecast first-quarter FY2020 sales of $125 million to $135 million, citing broader macroeconomic concerns and extremely soft demand from China. It expected FY2020 gross margins to remain consistent with FY2019 and capital expenditures to be flat with FY2019’s $17.1 million.
- China (including Hong Kong) accounted for 55% of FY2019 sales; foreign sales were 89%. Customer concentration included Trend-tek at 14%, Frontek at 11%, and Arrow Electronics at 10% of sales.
- Key risks include semiconductor cyclicality and pricing pressure; dependence on a limited number of foreign foundries and subcontractors; trade restrictions and tariffs; distributor and customer concentration; and product qualification, inventory and demand volatility. About 16% of wafer purchases by cost came from one Chinese foundry.
- Debt is variable-rate and secured, with a November 2021 maturity and financial covenants; Semtech reported covenant compliance at year-end. Management estimated a 100-basis-point rate increase would reduce annual net income and cash flow by about $2.1 million.
- The company reported an environmental remediation loss range of $5.3 million to $7.5 million for a former California site, with $1.9 million accrued and $3.4 million paid to date. Potential acquisition earn-outs remain, including up to $47.0 million for AptoVision and approximately $14.6 million for Cycleo, subject to performance terms.
- Management and the independent auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification points
- Assess whether the Q1 FY2020 sales outlook and expected China softness were borne out, given China’s 55% share of sales.
- Separate recurring operating performance from the Multiphy impairment, earn-out fair-value changes, HiLight settlement, tax valuation allowance release, ASC 606 impact and Comcast warrant revenue reduction.
- Review cash conversion and the sustainability of operating cash flow, considering working-capital movements and substantial noncash compensation.
- Track debt, variable-rate exposure, covenant headroom, and the balance of cash held by foreign subsidiaries; approximately $253.1 million of cash was held abroad.
- Monitor customer and distributor concentration, foundry dependence, remaining earn-out obligations, and the environmental remediation estimate.