MACOM Technology Solutions Holdings, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended April 1, 2016. Dollar amounts below are in millions unless noted. MACOM designs, manufactures and markets analog semiconductors and modules for Networks, Aerospace and Defense (A&D), and Multi-market applications.
Financial results and liquidity
| Metric | Three months ended Apr. 1, 2016 | Prior-year quarter | Six months ended Apr. 1, 2016 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $133.6 | $102.4 | $249.4 | $199.0 |
| Gross profit / margin | $65.5 / 49.1% | $46.7 / 45.6% | $125.8 / 50.5% | $94.1 / 47.3% |
| Operating income (loss) | $(7.2) | $(2.4) | $(7.0) | $1.0 |
| Net income (loss) | $(10.6) | $(7.5) | $(26.2) | $(13.8) |
| Net loss per diluted share | $(0.20) | $(0.15) | $(0.49) | $(0.28) |
- For the six months, operating cash flow was $35.1, investing cash flow $(83.9), and financing cash flow $(15.1); cash and cash equivalents declined by $64.1 to $58.2. The prior-year operating cash flow of $1.4 reflects a restatement that reclassified a $14.6 employee-retention escrow payment from investing to operating activities.
- Cash and short-term investments totaled $81.8 at quarter-end. Current assets were $308.0 and current liabilities $82.8.
- Term-loan principal was $343.9, with a 4.5% effective interest rate; there were no revolving-facility borrowings and $130.0 of revolving capacity. The company reported compliance with debt covenants.
- Total assets were $900.4, total liabilities $486.4, and stockholders’ equity $414.0. Inventory was $107.0, up from $79.9 at fiscal year-end.
Material changes versus the prior comparable period
- Quarterly revenue rose 30.4%; six-month revenue rose 25.3%. Networks revenue increased 43.5% for the quarter and 48.7% for the six months, helped by acquisitions and optical-related products. A&D revenue declined 7.3% and 18.0%, respectively; six-month Multi-market revenue declined 1.3%.
- Gross margin improved by 3.5 percentage points for the quarter and 3.2 points for the six months. Management cited stronger sales of higher-margin products and lower acquisition inventory step-up costs, partly offset by lower margins at acquired businesses and product-exit charges.
- Despite higher sales, six-month operating results moved from $1.0 of operating income to a $7.0 loss. Expense increases included R&D and SG&A, alongside $11.0 of operating impairment charges; the company also recorded $1.0 of restructuring charges.
- Six-month net loss increased to $26.2 from $13.8. A $19.1 noncash warrant-liability expense and higher amortization contributed to reported losses. The warrant liability increased to $40.9 from $21.8 at October 2, 2015.
Outlook, management commentary, risks and unusual items
- Management said the inventory build was intended to support anticipated second-half fiscal 2016 customer demand. No specific revenue or earnings guidance was provided. Management expected cash, investments, operating cash generation and revolving availability to cover working capital needs for at least 12 months.
- MACOM completed the FiBest and Aeroflex/Metelics acquisitions in December 2015, funded with cash on hand. Their purchase-price allocations remained preliminary. The Automotive business had been sold in August 2015; further contingent proceeds may depend on indemnification, earnout and consulting arrangements.
- MACOM exited its GaN-on-Silicon Carbide license and technology-transfer programs to focus on GaN-on-Silicon. Related charges totaled approximately $13.0, including $10.1 of intangible impairment, $0.6 of fixed-asset write-offs, $0.3 of contractual commitments and $2.0 of inventory charges.
- The company expected another $4.0–$6.0 of restructuring costs during the remainder of calendar 2016, primarily related to Metelics integration. It identified acquisition integration, international operations, product-development execution, customer and end-market demand, competition, and intellectual-property rights as risks.
- Disclosure controls were deemed ineffective as of April 1, 2016 because of an ongoing material weakness in IT general controls for user access and program change management. Remediation and testing were underway; management had not yet concluded the weakness was remediated.
- On April 26, 2016, after quarter-end, MACOM and its subsidiary sued Infineon and International Rectifier over contractual and GaN patent rights. The company said potential losses from legal proceedings could not be reasonably estimated and had not been accrued.
Important facts for investors to verify
- How much of revenue growth and margin improvement is sustainable organically versus attributable to acquisitions, product mix, and prior-period distributor revenue adjustments?
- Whether the inventory increase converts into expected second-half demand and cash generation, and whether cash and investment balances remain adequate after acquisition and restructuring spending.
- How preliminary FiBest and Metelics purchase accounting, acquired-business integration, and the stated restructuring costs affect future amortization, margins and results.
- Whether the material weakness is remediated after operating-effectiveness testing, and how the Infineon dispute and other contingencies develop.
- Customer concentration remained notable: the top ten customers represented 64% of six-month revenue, compared with 58% in the prior-year period.