Business context and reporting period
M/A-COM Technology Solutions Holdings, Inc. (MACOM) designs, manufactures and sells analog semiconductors and modules for wireless and wireline applications. This unaudited Form 10-Q covers the quarter and six months ended April 4, 2014. The quarter comprised 13 weeks; the six-month period comprised 27 weeks, compared with 26 weeks in the prior-year period.
Results reflect the December 2013 acquisition of Mindspeed Technologies and the February 2014 acquisition of Nitronex. Nitronex was under common control before acquisition, so prior periods were combined on a historical basis; Mindspeed results are consolidated from its acquisition date. MACOM also divested Mindspeed’s wireless business in February.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $107.8 | $78.8 | $192.0 | $154.9 |
| Gross profit / margin | $26.9 / 24.9% | $32.8 / 41.6% | $62.6 / 32.6% | $64.3 / 41.5% |
| Operating income (loss) | ($20.6) | $8.7 | ($29.8) | $18.4 |
| Continuing operations income (loss) | ($19.6) | $5.4 | ($26.4) | $9.5 |
| Net income (loss) | ($22.1) | $5.4 | ($31.0) | $9.5 |
| Diluted EPS | ($0.47) | $0.11 | ($0.67) | $0.20 |
- Revenue grew 36.8% in the quarter and 23.9% for the six months. Carrier Networks revenue increased 73.1% and 53.9%, respectively; Enterprise Networks contributed $12.4 million in the quarter and $13.0 million in the six months, primarily from Mindspeed products.
- Gross margin contracted sharply. Management attributed the 2014-period decline principally to $18.1 million of acquired Mindspeed inventory fair-value step-up expensed through cost of revenue, increased acquired-intangible amortization, and product mix.
- Operating expenses rose substantially: R&D was $20.3 million in the quarter and $32.8 million for six months; SG&A was $24.5 million and $43.9 million. Six-month restructuring charges were $15.7 million, including acquisition-related employee costs and workforce reductions.
- Other expenses included warrant-liability remeasurement expense of $4.1 million in the quarter and $2.8 million for six months, plus interest expense of $1.6 million and $2.2 million, respectively. Discontinued operations added losses of $2.5 million for the quarter and $4.6 million for six months.
- Cash from operations was negative $4.3 million for six months, versus positive $18.6 million a year earlier. Investing cash use was $259.6 million, primarily for Mindspeed and Nitronex acquisitions; financing provided $216.5 million, including $245.0 million of revolving-credit borrowings and repayment of $35.0 million of assumed debt. Cash declined to $63.1 million from $110.5 million at fiscal year-end.
- At April 4, cash was $63.1 million; revolving borrowings were $245.0 million and assumed notes were $4.5 million on the balance sheet. The filing reports $55.0 million of unused capacity under the then-existing $300 million revolving facility and compliance with its covenants. Current assets were $248.4 million and current liabilities $89.4 million.
Material changes, outlook and significant items
- On May 8, 2014, after quarter-end, MACOM refinanced the existing facility with $350 million of term loans maturing in May 2021 and a $100 million revolving facility maturing in May 2019; it drew the full term-loan amount and made no revolver draws. The new debt is secured by substantially all assets, carries variable rates, and has quarterly principal installments beginning in September 2014.
- MACOM completed the $232.0 million net-cash Mindspeed acquisition in December 2013 and acquired Nitronex for $26.1 million in February 2014. Mindspeed purchase accounting remained preliminary; final valuation and tax adjustments could materially change the recorded amounts.
- Management cited long-term growth opportunities in carrier, enterprise, aerospace and defense, automotive, and multi-market applications, and expected to maintain or increase R&D investment in future periods. It expected long-term gross-margin improvement from integration, cost savings, new products and higher volumes, excluding acquisition accounting effects. No specific revenue or earnings guidance was provided; management cautioned that interim results are not necessarily indicative of full-year results.
- Management stated that cash, operating cash generation and potential borrowing capacity were expected to meet working-capital needs for at least 12 months. The filing also identifies variable-rate debt exposure: a 1% rate change on then-outstanding revolving debt would change annual interest expense by approximately $2.5 million, assuming constant borrowings.
- Material risks include acquisition integration and realization of synergies; margin pressure and cyclical semiconductor demand; customer and distributor concentration; order cancellations and inventory risk; dependence on suppliers and manufacturing yields; product-development and GaN technology execution; and substantial debt, variable interest rates and restrictive covenants.
- Contingencies include a CSR contract dispute claiming $2.2 million, with a summary-judgment motion pending, and Mindspeed acquisition litigation. The Delaware settlement remained subject to court approval; California proceedings were ongoing. Management stated it did not expect the litigation matters to have a material financial-statement effect.
- MACOM reported disclosure controls effective as of April 4, but excluded Mindspeed and Nitronex from the assessment of acquired-business controls. The company had begun integrating their controls into its framework.
Important facts for investors to verify
- Whether reported revenue growth translates into improved underlying margins after the $18.1 million inventory step-up, acquired-intangible amortization and restructuring costs.
- Final Mindspeed purchase-price allocation, acquired tax assets and liabilities, and expected ongoing amortization and integration costs.
- Post-quarter refinancing terms, interest burden, principal repayments, covenant headroom and the company’s ability to generate operating cash to service debt.
- Progress and costs of Mindspeed and Nitronex integration, restructuring, and expected synergies—particularly for GaN products and manufacturing.
- Customer concentration and demand trends: the top ten customers represented 64% of quarterly revenue; the two largest disclosed customer categories represented 19% and 13%.
- Resolution of the disclosed litigation and completion or approval of the proposed Delaware settlement.