M/A-COM Technology Solutions Holdings, Inc. — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 29, 2012; comparable periods ended July 1, 2011. The company designs, manufactures and sells analog semiconductor products and modules for wireless and wireline applications. It reports one operating segment.
Financial highlights
| Metric | Three months ended June 29, 2012 | Nine months ended June 29, 2012 |
|---|---|---|
| Revenue | $77.1 million, down 2.0% year over year | $227.6 million, down 1.7% |
| Gross profit / margin | $35.4 million / 45.9%, versus 43.4% | $103.4 million / 45.4%, versus 41.9% |
| Operating income / margin | $15.4 million / 20.0%, versus $12.3 million / 15.7% | $41.9 million / 18.4%, versus $33.3 million / 14.4% |
| Net income (loss) | $13.5 million, versus a $40.0 million loss | $(18.0) million, versus a $41.2 million loss |
| Net income (loss) attributable to common stockholders | $13.5 million | $(20.6) million |
| Operating cash flow | Not separately stated for the quarter | $26.3 million, versus $18.4 million |
| Investing cash flow / capital spending | Not separately stated for the quarter | $(13.5) million, including $13.5 million of property and equipment purchases |
| Financing cash flow | Not separately stated for the quarter | $19.2 million |
At June 29, 2012, cash and cash equivalents were $77.6 million, current assets $195.1 million, current liabilities $56.5 million, total assets $252.3 million and stockholders’ equity $180.7 million. There were no borrowings on the $125 million revolving credit facility; the company reported covenant compliance. Interest expense was $0.5 million for the nine months. The filing does not report a separate quarter-end debt balance beyond the undrawn facility.
Changes and operating performance
- Revenue weakness was concentrated in Networks: quarterly sales fell 9.0% and nine-month sales fell 12.7%, primarily reflecting softer telecom-operator capital spending in a weak macroeconomic environment.
- Aerospace and Defense revenue rose 2.1% for the quarter and 4.9% year to date; Multi-market revenue was nearly flat for the quarter and up 2.1% year to date.
- Higher gross margins reflected lower manufacturing expenses, including reduced payroll and fewer one-time outsourced-activity costs; lower volume and increased third-party manufacturing costs partly offset the benefit.
- Operating income improved as gross margin increased and SG&A fell. Nine-month R&D increased 9.1% to $27.9 million as the company expanded product development. SG&A declined 9.8% to $33.0 million, partly due to lower professional fees, travel and restructuring-related payroll.
- The quarterly profit comparison is affected by fair-value accounting: the company recorded a $3.2 million gain on warrant liabilities in 2012, versus a $7.3 million expense in 2011. The prior-year quarter also included $39.6 million of Class B conversion-liability expense. These liabilities were settled or converted in connection with the March 2012 IPO.
Liquidity, capital and outlook
- The March 2012 IPO issued 5.556 million shares at $19 per share and generated approximately $93.7 million in net proceeds. The company paid $60 million to former Class B holders and converted preferred stock to common stock.
- Management said cash, cash equivalents and operating cash generation should cover cash needs for at least the next 12 months. Cash is intended for general corporate purposes, working capital and potentially acquisitions or investments.
- The company expected to pay the remaining maximum $6.2 million Cobham earn-out for the period ending September 30, 2012. The maximum potential Optomai earn-out for its second period is $16 million; no payment was made for the first period.
- The filing gives no quantified forward revenue or earnings guidance. It describes long-term growth drivers including design wins, new products, increased customer content and growth in target markets, while cautioning that demand may weaken. The filing also refers to an August 2012 announcement of lower-than-expected revenue, gross margin and business outlook; it reports an approximately 21% one-day share-price decline following that announcement.
Risks, contingencies and unusual items
- GigOptix litigation alleges trade-secret misappropriation and related claims involving Optomai and former GigOptix employees. GigOptix filed a renewed preliminary-injunction motion on July 30, 2012. Earlier requests for emergency and preliminary injunctions were denied. The company intends to defend the case; it said it could not estimate a reasonably possible loss and did not consider a material loss probable.
- Customer and market concentration remain relevant: two customers represented 17% and 16% of quarterly revenue; the top ten customers accounted for 54% of nine-month revenue. The filing highlights order cancellations or deferrals, inventory risk, cyclical demand, pricing and margin pressure, product-development execution, competition, supplier concentration and manufacturing disruptions.
- Contingent-consideration and warrant liabilities are Level 3 fair-value estimates using significant assumptions; changes can affect earnings materially. The company carried $9.5 million of contingent consideration and $13.5 million of warrant liability at quarter-end.
- A $1.6 million restructuring charge was recorded in the first quarter of fiscal 2012; $0.2 million remained unpaid at quarter-end, expected to be paid through fiscal Q1 2013. Restructuring activities were intended to lower operating costs.
- The company disclosed correction of a prior-period income-tax error: the 2011 interim tax provision and net loss were understated by $3.4 million. Management stated the error was not material to the previously issued interim statements.
- Management concluded disclosure controls were effective at June 29, 2012 and reported no material quarterly change in internal control over financial reporting. Separately, the risk factors say documentation and evaluation needed for future Section 404 compliance were not yet complete.
Important facts for investors to verify
- Whether Networks demand and telecom infrastructure spending recover, and how the subsequent outlook update changes expectations.
- Whether improved gross margin is sustainable given volume, product mix, fab utilization and outsourced manufacturing costs.
- Cash conversion and working-capital trends, particularly receivables, deferred revenue and inventory.
- Actual Cobham and Optomai earn-out payments and any resulting cash-flow effect.
- Developments and potential business impact of the GigOptix injunction request and litigation.
- Customer concentration, major-customer order patterns, and the post-IPO share count and ownership concentration.