MACOM Technology Solutions Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 28, 2013; filed August 5, 2013. Financial statement amounts below are in millions of dollars unless stated otherwise. The company designs and sells analog semiconductor products for wireless and wireline applications.
Financial performance
| Metric | Quarter ended June 28, 2013 | Prior-year quarter | Nine months ended June 28, 2013 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $82.2 | $77.1 | $235.1 | $227.6 |
| Gross profit / margin | $36.3 / 44.1% | $35.4 / 45.9% | $102.4 / 43.6% | $103.4 / 45.4% |
| Operating income / margin | $11.2 / 13.7% | $15.4 / 20.0% | $34.4 / 14.6% | $41.9 / 18.4% |
| Net income (loss) | $9.4 | $13.5 | $23.6 | $(18.0) |
| Diluted earnings (loss) per share | $0.20 | $0.29 | $0.50 | $(1.15) |
- Quarterly revenue rose 6.6%; nine-month revenue rose 3.3%. Automotive was the principal growth engine, increasing 62.1% for the quarter and 69.0% year to date. The largest automotive customer’s GPS-module adoption drove much of that increase.
- Performance varied across markets: quarterly Networks revenue increased 4.0%, while Aerospace and Defense declined 5.5% and Multi-market declined 16.1%. Year-to-date declines were 11.8% in Aerospace and Defense and 16.6% in Multi-market.
- Gross margin fell 1.8 percentage points for the quarter and 1.8 points year to date. Management cited unfavorable manufacturing variances and product mix, higher warranty costs, and increased non-cash compensation, depreciation and amortization. A $1.1 million inventory-costing estimate refinement partially offset these pressures by increasing inventory and reducing cost of sales in March 2013.
- Operating expenses rose to $25.1 million for the quarter from $20.0 million, including $0.95 million of restructuring charges. Higher R&D and SG&A also reflected compensation and other costs; the nine-month SG&A comparison included $1.3 million of remediation costs for an exited facility.
Cash, liquidity and debt
- Cash and cash equivalents were $115.6 million at June 28, 2013, up from $84.5 million at September 28, 2012. Current assets were $243.3 million and current liabilities $48.7 million.
- For the first nine months, operating cash flow was $35.5 million, capital expenditures were $6.7 million, and financing cash flow was $2.3 million. The resulting operating cash flow less capital expenditures was approximately $28.8 million.
- No borrowings were outstanding under the $150 million revolving facility, which matures in September 2016. The company reported compliance with its covenants. It stated that cash and operating cash generation should meet working-capital needs for at least 12 months.
- Potential additional cash commitments include up to $9 million for a technology licensing and transfer arrangement through July 2016 and up to $3.8 million under the amended Optomai earn-out. The company reported no off-balance-sheet arrangements.
Changes, outlook and notable items
- Nine-month net income improved from a prior-year loss, but the comparison is affected by a $44.1 million Class B conversion-liability expense in 2012 that was associated with the pre-IPO capital structure. In contrast, operating income declined year over year in both reported periods.
- Management expects to maintain or increase R&D spending in future periods and described long-term gross-margin improvement as an objective. It cited Networks growth from communications and data traffic, A&D demand tied to programs and budgets, continued automotive opportunity, and longer-term GaN potential. The filing provides no numerical revenue or earnings guidance.
- Management attributed softer demand in some markets to weaker telecommunications capital spending, fluctuating A&D demand, and reduced demand for certain consumer and catalog products. A lower-margin automotive mix and the ramp-down of higher-volume consumer products also affected manufacturing economics.
- The amended Optomai earn-out is being treated similarly to compensation rather than as a fair-value liability; $1.6 million was expensed in the three- and nine-month periods, with most allocated to R&D and the remainder to SG&A. Fair-value changes in common-stock warrants also affect reported earnings; the warrant liability was $9.6 million at quarter-end.
- Two legal matters remain: GigOptix litigation involving alleged trade-secret misappropriation and related claims, and a CSR contract dispute claiming $2.2 million in damages. The company intends to defend both and stated it did not believe loss was probable, but could not estimate a reasonably possible loss range. The court denied defendants’ request to stay the GigOptix case in July 2013.
- Customer concentration is material: one customer represented 25% of quarterly and nine-month revenue; the top ten customers represented 59% of revenue in both reported 2013 periods. The filing also identifies dependence on major automotive-customer demand as a business risk.
Important facts for investors to verify
- Whether automotive growth, particularly GPS-module sales to the largest customer, is sustainable and how customer concentration may affect future results.
- Whether gross-margin pressure persists as market mix, manufacturing utilization, yields and costs change; assess the effect of the inventory-estimation refinement separately from ongoing performance.
- Progress in the GigOptix and CSR matters, including any court decisions, settlements, defense costs or changes to the company’s assessment of potential loss.
- Cash use and obligations, including the Optomai earn-out, technology-transfer commitment, capital spending and compliance with revolving-credit covenants.
- Future impact of warrant-liability remeasurement and other non-operating items when evaluating earnings trends; the filing provides no numerical forward guidance.