MACOM Technology Solutions Holdings, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 28, 2018 (52 weeks). This is an annual report; the filing also reports fourth-quarter results. MACOM designs and sells high-performance analog and optical semiconductor products for Telecom, Data Center, and Industrial & Defense (I&D) markets.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $570.4 million | $698.8 million |
| Gross profit / margin | $245.7 million / 43.1% | $326.9 million / 46.8% |
| Operating income (loss) | $(106.5) million | $(16.1) million |
| Net income (loss) | $(140.0) million | $(169.5) million |
| Operating cash flow | $36.3 million | $61.1 million |
- Basic loss per share was $2.16; diluted loss per share was $2.57. Diluted EPS includes the required warrant-related numerator adjustment.
- Revenue by market: Telecom $222.9 million (39.1% of sales), Data Center $162.1 million (28.4%), and I&D $185.4 million (32.5%).
- Cash and cash equivalents were $94.7 million; short-term investments were $98.2 million. The company also had $160.0 million of available revolving-credit capacity. Working capital was $351.9 million.
- Term-loan principal was $679.9 million, at a 4.49% effective rate at year end; the term loans mature in May 2024. Debt is secured by a first-priority lien on substantially all company assets and is subject to covenants.
- Capital expenditures were $53.0 million. Total assets were $1.482 billion and stockholders’ equity was $668.7 million.
- Fourth-quarter revenue was $151.2 million and gross profit was $71.0 million. The quarter included a $16.1 million loss from continuing operations and a $0.4 million loss from discontinued operations.
Material changes versus prior year
- Revenue fell 18.4%; Telecom declined 34.4%, Data Center fell 6.0%, and I&D was nearly flat, down 0.5%. Telecom weakness reflected lower carrier optical and fiber-to-the-home sales in Asia and the LR4 divestiture; Data Center weakness reflected lower legacy optical, laser, and cloud data-center sales.
- Gross margin contracted 370 basis points to 43.1%, reflecting lower sales, ZTE-related inventory and asset charges, $17.2 million of production and product-line exit inventory costs, and higher depreciation and amortization. Lower acquired-inventory step-up costs partly offset these items.
- R&D rose 20.1% to $177.7 million, including higher AppliedMicro-related costs and increased Data Center investment. SG&A declined 14.0% to $161.7 million, primarily because FY2017 included AppliedMicro change-in-control and transaction costs.
- Operating cash flow decreased to $36.3 million. Cash declined to $94.7 million, while short-term investments increased to $98.2 million.
- Annual net loss improved from $169.5 million to $140.0 million, but included significant non-operating and divestiture items; the operating loss widened materially.
Outlook, commentary, risks, and unusual items
- Management expects long-term demand drivers to include communications-network upgrades, cloud adoption and higher-speed optical links, and modernization of defense radar and communications. The filing provides no quantified revenue or earnings guidance.
- Management expects to incur approximately $5.3–$6.7 million of additional restructuring costs in FY2019, primarily tied to exiting production and product lines, including the planned Ithaca, New York facility exit. Completion of the Ithaca transition is expected in FY2019.
- Material unusual items included a $34.3 million loss on the May 2018 LR4 business disposal, a $10.4 million equity-method loss on the Compute business investment, a $27.6 million non-cash gain from remeasuring warrant liabilities, and a $21.5 million income-tax benefit. The tax benefit was affected by tax reform and changes in valuation allowances; MACOM maintained substantial valuation allowances on deferred tax assets.
- The April 2018 U.S. export-denial order involving ZTE led to asset impairment and inventory charges. The restrictions were lifted in July 2018, but export controls and potential restrictions affecting major Chinese customers remain risks.
- MACOM settled its GaN-on-Silicon litigation with Infineon in October 2018, after fiscal year-end; claims and counterclaims were dismissed, and disputed patents were assigned back to MACOM, among other terms.
- Key risks include rapid product and technology change, price erosion, customer order volatility and inventory exposure, dependence on distributors and suppliers, international and export-control exposure, execution of Data Center growth plans, acquisition integration, and substantial debt obligations. The company reported effective disclosure controls and internal controls over financial reporting; the auditor issued unqualified opinions.
Important facts for investors to verify
- Whether Telecom sales stabilize and Data Center products achieve expected customer adoption and volume shipments.
- How much of the FY2018 operating loss and margin decline is recurring versus attributable to product exits, ZTE-related charges, amortization, and other unusual items.
- Cash conversion, inventory quality, distributor exposure, and the sustainability of operating cash flow as sales change.
- Debt-service capacity, covenant headroom, variable-rate exposure, and the impact of the $679.9 million term-loan balance.
- Progress and actual costs of the FY2019 restructuring and Ithaca facility transition, as well as amounts ultimately collected for the LR4 disposal.
- Effects of export restrictions, customer concentration, and the Compute equity investment’s continuing losses on future results.