MACOM(MTSI) - 2020 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Part I of the 10-Q report provides the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements for MACOM Technology Solutions Holdings, Inc., covering the balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with comprehensive notes detailing accounting policies, revenue disaggregation, investments, fair value measurements, debt, leases, impairments, intangible assets, stockholders' equity, earnings per share, commitments, restructurings, share-based compensation, income taxes, supplemental cash flow information, geographic and significant customer data, and related-party transactions Condensed Consolidated Balance Sheets Presents the company's financial position, detailing assets, liabilities, and stockholders' equity at specific reporting dates Condensed Consolidated Balance Sheets (Unaudited, in thousands) | ASSETS | July 3, 2020 | September 27, 2019 | | :--------------------------------------- | :----------- | :--------------- | | Cash and cash equivalents | $131,870 | $75,519 | | Short-term investments | 133,248 | 101,226 | | Accounts receivable, net | 60,504 | 69,790 | | Inventories | 95,576 | 107,880 | | Total current assets | 450,268 | 398,582 | | Property and equipment, net | 122,000 | 132,647 | | Goodwill | 314,779 | 314,727 | | Intangible assets, net | 143,317 | 181,228 | | TOTAL ASSETS | $1,121,127 | $1,105,574 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | 95,017 | 74,836 | | Long-term debt, less current portion | 652,947 | 655,272 | | Warrant liability | 27,315 | 12,364 | | Total liabilities | 847,823 | 791,678 | | Total stockholders' equity | 273,304 | 313,896 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $1,121,127 | $1,105,574 | Condensed Consolidated Statements of Operations Details the company's revenues, costs, and net income or loss over specified reporting periods Condensed Consolidated Statements of Operations (Unaudited, in thousands, except per share data) | Metric | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :--------------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Revenue | $137,267 | $108,306 | $382,788 | $387,460 | | Cost of revenue | 66,391 | 74,478 | 190,338 | 219,678 | | Gross profit | 70,876 | 33,828 | 192,450 | 167,782 | | Total operating expenses | 64,376 | 357,601 | 201,747 | 536,163 | | Income (loss) from operations | 6,500 | (323,773) | (9,297) | (368,381) | | Total other expense, net | (29,732) | (2,263) | (49,557) | (25,587) | | Loss before income taxes | (23,232) | (326,036) | (58,854) | (393,968) | | Income tax expense (benefit) | 1,750 | (1,322) | 4,716 | 346 | | Net loss | $(24,982) | $(324,714) | $(63,570) | $(394,314) | | Loss per share - Basic | $(0.37) | $(4.93) | $(0.96) | $(6.01) | | Loss per share - Diluted | $(0.37) | $(4.95) | $(0.96) | $(6.09) | Condensed Consolidated Statements of Comprehensive Loss Reports the company's net loss and other comprehensive income or loss components for the reporting periods Condensed Consolidated Statements of Comprehensive Loss (Unaudited, in thousands) | Metric | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :------------------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(24,982) | $(324,714) | $(63,570) | $(394,314) | | Unrealized gain on short term investments, net of tax | 1,697 | 105 | 400 | 455 | | Foreign currency translation gain (loss), net of tax | 458 | 996 | (477) | 2,256 | | Other comprehensive income (loss), net of tax | 2,155 | 1,101 | (77) | 2,711 | | Total comprehensive loss | $(22,827) | $(323,613) | $(63,647) | $(391,603) | Condensed Consolidated Statements of Stockholders' Equity Outlines changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit Condensed Consolidated Statements of Stockholders' Equity (Unaudited, in thousands) - Nine Months Ended July 3, 2020 | Metric | Common Stock (Shares) | Common Stock (Amount) | Treasury Stock (Shares) | Treasury Stock (Amount) | Accumulated Other Comprehensive Income | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | | :------------------------------------------ | :-------------------- | :-------------------- | :---------------------- | :---------------------- | :------------------------------------- | :------------------------- | :------------------ | :------------------------- | | Balance at September 27, 2019 | 66,177 | $66 | (23) | $(330) | $4,358 | $1,101,576 | $(791,774) | $313,896 | | Cumulative effect of ASU 2016-02 | — | — | — | — | — | — | (1,875) | (1,875) | | Stock options exercises | 41 | — | — | — | — | 168 | — | 168 | | Vesting of restricted common stock and units | 636 | 1 | — | — | — | — | — | 1 | | Issuance of common stock pursuant to employee stock purchase plan | 272 | — | — | — | — | 4,397 | — | 4,397 | | Shares repurchased for tax withholdings on equity awards | (223) | — | — | — | — | (6,557) | — | (6,557) | | Share-based compensation | — | — | — | — | — | 26,921 | — | 26,921 | | Other comprehensive loss, net of tax | — | — | — | — | (77) | — | — | (77) | | Net loss | — | — | — | — | — | — | (63,570) | (63,570) | | Balance at July 3, 2020 | 66,903 | $67 | (23) | $(330) | $4,281 | $1,126,505 | $(857,219) | $273,304 | Condensed Consolidated Statements of Cash Flows Summarizes the cash inflows and outflows from operating, investing, and financing activities over specified periods Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) - Nine Months Ended | Cash Flow Activity | July 3, 2020 | June 28, 2019 | | :------------------------------------------ | :----------- | :------------ | | Net cash provided by operating activities | $96,994 | $28,277 | | Net cash used in investing activities | $(31,970) | $(33,060) | | Net cash used in financing activities | $(8,462) | $(4,792) | | Foreign currency effect on cash | $(211) | $164 | | NET CHANGE IN CASH AND CASH EQUIVALENTS | $56,351 | $(9,411) | | CASH AND CASH EQUIVALENTS — Beginning of period | $75,519 | $94,676 | | CASH AND CASH EQUIVALENTS — End of period | $131,870 | $85,265 | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering significant accounting policies, revenue disaggregation, investment details, fair value measurements, inventory composition, property and equipment, debt obligations, lease accounting, impairment charges, intangible assets, stockholders' equity, earnings per share calculations, commitments and contingencies, restructuring activities, share-based compensation, income tax details, supplemental cash flow information, geographic and significant customer data, and related-party transactions 1. Basis of Presentation and Summary of Significant Accounting Policies Outlines the basis of financial statement preparation and key accounting policies, including the adoption of new lease standards - The financial statements are unaudited and prepared in accordance with SEC rules, reflecting all necessary adjustments for fair presentation. The company's fiscal year is 52 or 53 weeks, ending on the Friday closest to the last day of September. Fiscal year 2020 includes 53 weeks, with the extra week in the first quarter[24][27] - The company adopted ASU 2016-02, Leases (Topic 842) on the first day of fiscal year 2020, using a modified retrospective approach. This resulted in an increase of approximately $37.1 million in total assets, $39.0 million in total liabilities, and a $1.9 million decrease in retained earnings due to the recognition of ROU assets and lease liabilities[30][31] - The adoption of the new lease guidance did not materially impact the condensed consolidated statement of operations, cash flows, or earnings per share for the three and nine months ended July 3, 2020[34] 2. Revenue Provides disaggregated revenue data by market and geographic region, along with contract liabilities Revenue by Market (in thousands) | Market | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Telecommunications | $56,800 | $43,883 | $154,049 | $141,379 | | Industrial & Defense | $48,035 | $46,809 | $146,586 | $154,563 | | Data Center | $32,432 | $17,614 | $82,153 | $91,518 | | Total | $137,267 | $108,306 | $382,788 | $387,460 | Revenue by Geographic Region (in thousands) | Geographic Region | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | United States | $53,633 | $52,340 | $163,964 | $185,172 | | China | $55,886 | $27,451 | $133,659 | $104,491 | | Asia Pacific, excluding China | $19,688 | $16,371 | $58,552 | $60,384 | | Other Countries | $8,060 | $12,144 | $26,613 | $37,413 | | Total | $137,267 | $108,306 | $382,788 | $387,460 | Contract Liabilities (in thousands) | Metric | July 3, 2020 | September 27, 2019 | $ Change | % Change | | :----------------- | :----------- | :----------------- | :------- | :------- | | Contract liabilities | $10,653 | $11,003 | $350 | 3% | 3. Investments Details the company's short-term and non-marketable equity investments, including fair value and associated losses Short-term Investments (in thousands) - July 3, 2020 | Investment Type | Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Aggregate Fair Value | | :---------------------- | :------------- | :----------------------------- | :------------------------------ | :------------------- | | Corporate bonds | $30,097 | $354 | $(179) | $30,272 | | Commercial paper | $102,749 | $247 | $(20) | $102,976 | | Total short-term investments | $132,846 | $601 | $(199) | $133,248 | - The company holds two non-marketable equity investments classified as other long-term investments. One is a Series B preferred stock in a privately held manufacturing corporation, accounted for at cost less impairment, with a cost of $5.0 million as of July 3, 2020. The other is a minority investment in a private company ('Compute'), valued using the equity method, with a carrying value of $5.0 million as of July 3, 2020, down from $18.6 million on September 27, 2019, due to recorded losses[41][42] Losses Associated with Minority Equity Investment (in thousands) | Period | Loss (Income) | | :-------------------------------- | :------------ | | Three Months Ended July 3, 2020 | $(4,600) | | Nine Months Ended July 3, 2020 | $(13,600) | | Three Months Ended June 28, 2019 | $5,000 | | Nine Months Ended June 28, 2019 | $(3,900) | 4. Fair Value Explains the fair value hierarchy and presents assets and liabilities measured at fair value on a recurring basis - The company classifies financial assets and liabilities measured at fair value into three levels based on input observability: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[43][44][45] Assets and Liabilities Measured at Fair Value on a Recurring Basis (in thousands) - July 3, 2020 | Item | Fair Value | Level 1 | Level 2 | Level 3 | | :-------------------------- | :--------- | :------ | :------ | :------ | | Assets: | | | | | | Money market funds | $10,375 | $10,375 | $— | $— | | Commercial paper | $102,976 | $— | $102,976 | $— | | Corporate bonds | $30,272 | $— | $30,272 | $— | | Total assets | $143,623 | $10,375 | $133,248 | $— | | Liabilities: | | | | | | Common stock warrant liability | $27,315 | $— | $— | $27,315 | | Total liabilities | $27,315 | $— | $— | $27,315 | Quantitative Information for Level 3 Liabilities (Warrant liability) | Input | July 3, 2020 | September 27, 2019 | | :-------------- | :----------- | :--------------- | | Volatility | 79.8% | 61.4% | | Discount rate | 0.14% | 1.71% | | Expected life | 0.5 years | 1.2 years | | Exercise price | $14.05 | $14.05 | | Stock price | $35.13 | $21.68 | | Dividend rate | —% | —% | 5. Inventories Breaks down inventory components, including raw materials, work-in-process, and finished goods Inventories (in thousands) | Category | July 3, 2020 | September 27, 2019 | | :--------------- | :----------- | :--------------- | | Raw materials | $53,936 | $59,184 | | Work-in-process | $11,427 | $13,799 | | Finished goods | $30,213 | $34,897 | | Total inventory, net | $95,576 | $107,880 | 6. Property and Equipment Details the composition of property and equipment, net of accumulated depreciation, and related expenses Property and Equipment (in thousands) | Category | July 3, 2020 | September 27, 2019 | | :-------------------------- | :----------- | :--------------- | | Construction in process | $14,643 | $24,848 | | Machinery and equipment | $192,835 | $175,696 | | Leasehold improvements | $18,715 | $12,962 | | Furniture and fixtures | $3,199 | $3,716 | | Computer equipment and software | $18,421 | $18,116 | | Capital lease and financed assets | $— | $46,496 | | Finance lease assets | $36,112 | $— | | Total property and equipment | $283,925 | $281,834 | | Less accumulated depreciation and amortization | $(161,925) | $(149,187) | | Property and equipment, net | $122,000 | $132,647 | Depreciation and Amortization Expense (in thousands) | Period | Property and Equipment | | :-------------------------------- | :--------------------- | | Three Months Ended July 3, 2020 | $7,100 | | Nine Months Ended July 3, 2020 | $21,800 | | Three Months Ended June 28, 2019 | $7,300 | | Nine Months Ended June 28, 2019 | $22,400 | 7. Debt Describes the company's credit agreement, term loans, and scheduled principal payments - As of July 3, 2020, the company's Credit Agreement included $700.0 million in Term Loans and a $160.0 million Revolving Facility. The Term Loans mature in May 2024 and bear interest at LIBOR plus 2.25% or base rate plus 1.25%[52] Term Loans Outstanding (in thousands, except rate data) - July 3, 2020 | Metric | Amount | | :-------------------------- | :------- | | Principal Outstanding | $667,808 | | LIBOR Rate | 0.18% | | Margin | 2.25% | | Effective Interest Rate | 2.43% | Term Loans Outstanding (in thousands) - July 3, 2020 | Metric | Amount | | :-------------------------- | :------- | | Principal balance | $667,808 | | Unamortized discount | $(2,507) | | Unamortized deferred financing costs | $(5,469) | | Total term loans | $659,832 | | Current portion | $6,885 | | Long-term, less current portion | $652,947 | Minimum Principal Payments Under Term Loans (in thousands) | Fiscal Year | Amount | | :------------------------ | :------- | | 2020 (remainder) | $1,721 | | 2021 | $6,885 | | 2022 | $6,885 | | 2023 | $6,885 | | 2024 | $645,432 | | Total | $667,808 | 8. Leases Outlines the company's operating and finance lease arrangements, including ROU assets, lease liabilities, and lease expenses - The company has operating leases for facilities and equipment, and finance leases for its corporate headquarters and manufacturing equipment, expiring through 2038 with some renewal options. Leases with terms over one year are recognized on the balance sheet as ROU assets and lease liabilities[57][58] Lease Assets and Liabilities (in thousands) - July 3, 2020 | Category | Amount | | :-------------------------- | :------- | | Assets: | | | | Operating lease ROU assets | $32,157 | | Finance lease assets | $33,919 | | Total lease assets | $66,076 | | Liabilities: | | | | Current operating lease liabilities | $7,498 | | Current finance lease liabilities | $1,506 | | Long-term operating lease liabilities | $30,438 | | Long-term finance lease liabilities | $29,351 | | Total lease liabilities | $68,793 | Weighted-Average Lease Terms and Discount Rates (July 3, 2020) | Metric | Operating Leases | Finance Leases | | :-------------------------------- | :--------------- | :------------- | | Weighted-average remaining lease term (in years) | 6.57 | 17.07 | | Weighted-average discount rate | 6.36 % | 6.71 % | Components of Lease Expense (in thousands) - Nine Months Ended July 3, 2020 | Expense Type | Amount | | :---------------------- | :------- | | Total finance lease cost | $3,834 | | Operating lease cost | $7,393 | | Variable lease cost | $1,937 | | Short-term lease cost | $339 | | Sublease income | $(442) | 9. Impairments Details impairment charges recorded for intangible assets and construction in process in prior periods - During the fiscal quarter ended June 28, 2019, the company recorded impairment charges of $217.5 million for customer relationship intangible assets and $33.2 million for acquired technology intangible assets, totaling $250.7 million, due to a reassessment of future revenue growth following the 2019 Plan[63] - Additional impairment charges of $2.4 million for customer relationship intangible assets and $3.9 million for acquired technology intangible assets were recorded for abandoned assets. A $7.1 million impairment charge was also recorded for construction in process that could not be placed in service[64][65] 10. Intangible Assets Presents the carrying value and amortization schedule for acquired technology, customer relationships, and trade name intangible assets Amortization Expense Related to Intangible Assets (in thousands) | Category | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :-------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $4,348 | $8,139 | $13,115 | $24,074 | | Selling, general and administrative | $8,071 | $13,723 | $24,797 | $38,115 | | Total | $12,419 | $21,862 | $37,912 | $62,189 | Intangible Assets (in thousands) | Category | July 3, 2020 | September 27, 2019 | | :-------------------- | :----------- | :--------------- | | Acquired technology | $179,434 | $179,682 | | Customer relationships | $245,870 | $245,870 | | Trade name (indefinite-lived) | $3,400 | $3,400 | | Total | $428,704 | $428,952 | | Less accumulated amortization | $(285,387) | $(247,724) | | Intangible assets — net | $143,317 | $181,228 | Estimated Amortization of Intangible Assets (in thousands) - As of July 3, 2020 | Fiscal Year | Amortization Expense | | :---------------- | :------------------- | | 2020 Remaining | $12,418 | | 2021 | $46,213 | | 2022 | $33,433 | | 2023 | $26,048 | | 2024 | $15,410 | | Thereafter | $6,395 | | Total | $139,917 | 11. Stockholders' Equity Details authorized shares, common stock warrants, and their impact on the financial statements - The company has authorized 10 million shares of preferred stock and 300 million shares of common stock, both with a $0.001 par value, as of July 3, 2020[68] - Warrants to purchase 1,281,358 shares of common stock at $14.05 per share were issued in March 2012 and expire on December 21, 2020. These warrants are recorded as a long-term liability at estimated fair value, with changes impacting the statements of operations[69][70] 12. Earnings (Loss) Per Share Provides basic and diluted net loss per share calculations and the impact of antidilutive shares Net Loss Per Share (in thousands, except per share data) | Metric | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :------------------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Net loss attributable to common stockholders | $(24,982) | $(326,641) | $(63,570) | $(400,102) | | Weighted average common shares outstanding-basic | 66,796 | 65,858 | 66,512 | 65,555 | | Weighted average common shares outstanding-diluted | 66,796 | 65,945 | 66,512 | 65,722 | | Net loss to common stockholders per share-Basic | $(0.37) | $(4.93) | $(0.96) | $(6.01) | | Net loss to common stockholders per share-Diluted | $(0.37) | $(4.95) | $(0.96) | $(6.09) | - The calculation of diluted loss per share excludes the effects of 1,766,561 and 1,543,686 potential shares for the three and nine months ended July 3, 2020, respectively, as their inclusion would be antidilutive[71] 13. Commitments and Contingencies Addresses potential legal proceedings and other commitments the company may face - The company may face commercial disputes, employment issues, and intellectual property infringement claims. As of July 3, 2020, there were no material pending legal proceedings[72] 14. Restructurings Details the company's restructuring activities, including employee and facility-related charges and expected savings - The company has implemented restructuring actions to reduce staffing, manufacturing footprint, and operating costs, primarily involving headcount reductions and facility closures[73] Restructuring (Benefit) Charges (in thousands) | Category | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :------------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Employee related expenses and adjustments | $(761) | $5,135 | $787 | $6,742 | | Facility related expenses | $207 | $3,752 | $707 | $10,305 | | Total restructuring (benefit) charges | $(554) | $8,887 | $1,494 | $17,047 | Accrued Restructuring Liabilities Rollforward (in thousands) - Nine Months Ended July 3, 2020 | Category | Employee-Related Expense | Facility-Related Expense | Total | | :-------------------------- | :----------------------- | :----------------------- | :------ | | Balance at September 27, 2019 | $1,549 | $978 | $2,527 | | Charges and adjustments | $787 | $707 | $1,494 | | Charges paid/settled/other | $(1,460) | $(1,492) | $(2,952) | | Balance at July 3, 2020 | $876 | $193 | $1,069 | - The 2019 Plan, initiated in the fiscal quarter ended June 28, 2019, involved reducing the workforce by approximately 250 employees, exiting six development facilities, and ceasing investment in optical modules for Data Center applications. This plan is expected to result in annual expense savings of approximately $50 million once fully implemented[80][134] 15. Share-Based Compensation Outlines share-based compensation plans, expense recognition, and unrecognized compensation costs - As of July 3, 2020, 17.0 million shares were available under the 2012 Omnibus Incentive Plan and 3.6 million shares under the Employee Stock Purchase Plan. Awards include ISOs, NSOs, RSAs, RSUs, and PRSUs, with vesting based on market and performance criteria[82] Share-Based Compensation Expense (in thousands) | Category | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :-------------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $814 | $651 | $2,771 | $2,165 | | Research and development | $2,921 | $2,517 | $9,939 | $6,540 | | Selling, general and administrative | $4,760 | $(353) | $14,211 | $11,458 | | Total share-based compensation expense | $8,495 | $2,815 | $26,921 | $20,163 | - Total unrecognized compensation costs for ISOs, RSAs, and RSUs were $53.2 million as of July 3, 2020, expected to be recognized over a weighted-average period of 2.2 years. Unrecognized compensation cost for the Employee Stock Purchase Plan was $0.8 million[83][84] 16. Income Taxes Presents income tax expense, effective tax rates, and factors influencing tax rate differences Income Tax Expense (Benefit) and Effective Income Tax Rate (in thousands, except percentages) | Metric | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :-------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Income tax expense (benefit) | $1,750 | $(1,322) | $4,716 | $346 | | Effective income tax rate | (7.5)% | 0.4% | (8.0)% | (0.1)% | - The difference from the U.S. federal statutory income tax rate of 21% is primarily due to a full valuation allowance against U.S. losses and income taxed at lower rates in foreign jurisdictions where a valuation allowance is not needed[89] - The CARES Act, enacted on March 27, 2020, technically corrected the Tax Act, limiting the net operating loss carryforward for fiscal year 2018 to 20 years. This resulted in a $1.4 million increase in the indefinite-lived deferred tax liability and an offsetting adjustment to tax expense during the fiscal quarter ended April 3, 2020[94] 17. Supplemental Cash Flow Information Provides additional details on non-cash investing activities and cash payments for interest and income taxes - As of July 3, 2020, $0.5 million in unpaid property and equipment purchases were included in accounts payable and accrued liabilities, excluded from cash flow statements until paid[95] Supplemental Cash Flow Information (in thousands) - Nine Months Ended | Metric | July 3, 2020 | June 28, 2019 | | :-------------------------------- | :----------- | :------------ | | Cash paid for interest | $20,035 | $25,675 | | Cash paid (refunded) for income taxes | $309 | $(1,713) | 18. Geographic and Significant Customer Information Details the company's operating segment, geographic property and equipment, and customer revenue concentrations - The company operates as one reportable operating segment, designing, developing, manufacturing, and marketing semiconductors and modules, with consolidated metrics used for performance assessment[97] Net Property and Equipment by Geographic Region (in thousands) | Region | July 3, 2020 | September 27, 2019 | | :---------------- | :----------- | :--------------- | | United States | $103,389 | $116,037 | | Other Countries | $18,611 | $16,610 | | Total | $122,000 | $132,647 | Customer Concentrations as a Percentage of Revenue | Customer | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :--------- | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Customer A | 13% | 17% | 14% | 15% | | Customer B | 14% | — | 11% | — | | Customer C | 14% | — | 10% | — | | Top Ten Customers | 66% | 54% | 61% | 54% | 19. Related-Party Transactions Discloses sales of commercial products to an affiliate of significant stockholders and a CEO's equity interest - During the nine months ended July 3, 2020, the company sold $0.2 million of commercial products to Mission Microwave Technologies, LLC, an affiliate of directors John and Susan Ocampo (MACOM's largest stockholders). Stephen G. Daly, MACOM's CEO, holds a less than 1% equity interest in Mission[100] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial performance and condition, including an overview of its business, the impact of COVID-19, key revenue drivers, critical accounting policies, and a detailed comparison of operating results for the three and nine months ended July 3, 2020, versus the prior year. It also discusses liquidity, capital resources, recent accounting pronouncements, and off-balance sheet arrangements Overview Provides an overview of MACOM's business, product offerings, and target markets across Telecommunications, Industrial & Defense, and Data Center segments - MACOM designs and manufactures semiconductor products for Telecommunications, Industrial and Defense, and Data Center applications, leveraging over 65 years of expertise in various fabrication technologies. The company offers a broad portfolio of thousands of standard and custom devices to over 6,000 end-customers[106] - Primary markets include Telecom (carrier infrastructure, 5G, FTTx/PON), Industrial & Defense (military/commercial radar, RF jammers, satellite communications, multi-market applications), and Data Center (analog ICs and photonic components for high-speed optical modules)[106] COVID-19 Impact Discusses the operational adjustments and potential future financial risks posed by the COVID-19 pandemic - COVID-19 has led to modified business practices and disruptions in operations, but as of the nine months ended July 3, 2020, it did not have a material impact on consolidated operating results[107] - Significant economic uncertainty and volatility from the pandemic make it difficult to predict future impacts on product demand. Potential adverse effects include increased credit risks, supplier impacts, asset impairments, declines in financial instrument values, and adverse impacts on capital resources[108] Description of Our Revenue Explains the sources of revenue and anticipated growth drivers across key market segments, including 5G and high-speed interconnects - Revenue is derived from sales of high-performance RF, microwave, millimeter wave, optical, and photonic semiconductor products. Future revenue growth is expected to be driven by: continued demand for high-performance analog, digital, and optical semiconductors; new product introductions with advanced technologies; increased semiconductor content in customer systems; leveraging leadership in standard catalog products; and early engagement with lead customers for custom and standard products[111][118] - Telecom market revenue is expected to be driven by 5G deployments and upgrades. I&D market revenue will be driven by an expanding product portfolio for test and measurement, satellite communications, radar, industrial, scientific, and medical applications. Data Center market revenue is anticipated from cloud-based services adoption and upgrades to higher-speed interconnects (100G, 200G, 400G, 800G)[112][113][114] Critical Accounting Policies and Estimates Highlights key accounting policies and estimates requiring significant management judgment, such as inventory and asset impairment valuations - The preparation of financial statements requires management to make estimates and judgments, which are inherently uncertain and could materially differ from actual results. Key areas requiring significant judgment include inventories and associated reserves, goodwill and long-lived asset valuations and impairment assessments, revenue reserves, and share-based compensation valuations[115][117] - Valuation of long-lived asset groups for impairment involves significant management judgment, relying on forecasts of future operating results, growth rates, useful lives, terminal values, and weighted average cost of capital. Inaccurate forecasts or adverse changes in market conditions could lead to impairment charges[118][119] Results of Operations Analyzes the company's financial performance, comparing operating results for the current and prior year periods Statements of Operations Data (in thousands) | Metric | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :--------------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Revenue | $137,267 | $108,306 | $382,788 | $387,460 | | Gross profit | $70,876 | $33,828 | $192,450 | $167,782 | | Research and development | $34,948 | $42,708 | $105,936 | $128,593 | | Selling, general and administrative | $29,982 | $41,920 | $94,317 | $126,437 | | Impairment charges | $— | $264,086 | $— | $264,086 | | Restructuring (benefit) charges | $(554) | $8,887 | $1,494 | $17,047 | | Income (loss) from operations | $6,500 | $(323,773) | $(9,297) | $(368,381) | | Warrant liability (expense) gain | $(19,511) | $1,927 | $(14,951) | $5,788 | | Net loss | $(24,982) | $(324,714) | $(63,570) | $(394,314) | Statements of Operations Data as a Percentage of Revenue | Metric | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :--------------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Revenue | 100.0% | 100.0% | 100.0% | 100.0% | | Gross profit | 51.6% | 31.2% | 50.3% | 43.3% | | Research and development | 25.5% | 39.4% | 27.7% | 33.2% | | Selling, general and administrative | 21.8% | 38.7% | 24.6% | 32.6% | | Impairment charges | — | 243.8% | — | 68.2% | | Restructuring (benefit) charges | (0.4)% | 8.2% | 0.4% | 4.4% | | Income (loss) from operations | 4.7% | (298.9)% | (2.4)% | (95.1)% | | Warrant liability (expense) gain | (14.2)% | 1.8% | (3.9)% | 1.5% | | Net loss | (18.2)% | (299.8)% | (16.6)% | (101.8)% | Comparison of the Three and Nine Months Ended July 3, 2020 to the Three and Nine Months Ended June 28, 2019 Compares the financial performance metrics for the three and nine months ended July 3, 2020, against the corresponding periods in the prior fiscal year Revenue Analyzes revenue changes by market segment, highlighting growth drivers and declines for the reported periods Revenue by Market (in thousands, except percentages) | Market | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | % Change (3M) | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | % Change (9M) | | :------------------- | :------------------------------ | :----------------------------- | :------------ | :----------------------------- | :----------------------------- | :------------ | | Telecom | $56,800 | $43,883 | 29.4% | $154,049 | $141,379 | 9.0% | | Industrial & Defense | $48,035 | $46,809 | 2.6% | $146,586 | $154,563 | (5.2)% | | Data Center | $32,432 | $17,614 | 84.1% | $82,153 | $91,518 | (10.2)% | | Total | $137,267 | $108,306 | 26.7% | $382,788 | $387,460 | (1.2)% | - Telecom revenue increased due to higher sales of carrier-based optical semiconductor products, including 5G applications, offset by lower sales of legacy products. Data Center revenue surged in the three-month period due to increased sales of high-performance analog products, but decreased over nine months primarily due to $7.0 million in licensing revenue recognized in the prior year[126][128] - I&D market revenue saw a slight increase in the three-month period but decreased over nine months, mainly due to a decline in certain defense-related programs and lower sales of legacy product lines[127] Gross profit Examines the changes in gross profit and margin, attributing improvements to strategic realignments and cost reductions - Gross margin increased significantly to 51.6% (from 31.2%) for the three months ended July 3, 2020, and to 50.3% (from 43.3%) for the nine months ended July 3, 2020. This improvement was primarily driven by the strategic realignment under the 2019 Plan, lower compensation-related costs, and reduced intangible amortization and inventory reserve expenses[129] Research and development Discusses the decrease in R&D expenses due to strategic realignment and reduced activities - Research and development expense decreased by 18.2% to $34.9 million for the three months and by 17.6% to $105.9 million for the nine months ended July 3, 2020. This reduction is mainly attributed to the strategic realignment of business and operations under the 2019 Plan, leading to lower compensation costs and reduced R&D activities[130] Selling, general and administrative Analyzes the reduction in SG&A expenses, driven by lower amortization, compensation, and external service costs - Selling, general and administrative expense decreased by 28.5% to $30.0 million for the three months and by 25.4% to $94.3 million for the nine months ended July 3, 2020. The decrease was primarily due to lower intangible amortization, reduced compensation-related costs from the 2019 Plan, and decreased spending on external services, partially offset by an increase in employee-related share-based compensation[131] Impairment charges Details the significant impairment charges recorded in the prior year for intangible assets and construction in process - Impairment charges totaled $264.1 million for the three and nine months ended June 28, 2019, comprising $257.0 million for intangible assets and $7.1 million for equipment from construction in process that was not placed in service. No impairment charges were recorded in the current periods[132] Restructuring (benefit) charges Explains the restructuring benefit in the current quarter and charges in prior periods, stemming from workforce and facility adjustments - The company recorded a restructuring benefit of $0.6 million for the three months ended July 3, 2020, primarily due to an adjustment to accrued employee-related costs from retaining certain employees. For the nine months, charges were $1.5 million. In contrast, the prior year periods saw charges of $8.9 million and $17.0 million, respectively, mainly from the 2019 Plan[133][134] - The 2019 Plan involved reducing the workforce by approximately 250 employees and exiting six development facilities. The company expects to incur up to $0.2 million in additional restructuring costs through fiscal year 2020, with anticipated annual expense savings of approximately $50 million upon full implementation[134] Warrant liability Discusses the expense or gain related to the warrant liability, primarily influenced by changes in the underlying stock price - The warrant liability resulted in an expense of $19.5 million and $15.0 million for the three and nine months ended July 3, 2020, respectively, compared to a gain of $1.9 million and $5.8 million in the prior year periods. This change was driven by fluctuations in the estimated fair value of common stock warrants, primarily due to changes in the underlying stock price[137] Provision for income taxes Analyzes income tax expense and effective tax rates, noting the impact of valuation allowances and foreign jurisdictions Income Tax Expense (Benefit) and Effective Income Tax Rate (in thousands, except percentages) | Metric | Three Months Ended July 3, 2020 | Three Months Ended June 28, 2019 | Nine Months Ended July 3, 2020 | Nine Months Ended June 28, 2019 | | :-------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | | Income tax expense (benefit) | $1,750 | $(1,322) | $4,716 | $346 | | Effective income tax rate | (7.5)% | 0.4% | (8.0)% | (0.1)% | - The effective income tax rate differs from the U.S. federal statutory rate of 21% primarily due to a full valuation allowance against U.S. losses and income taxed at lower rates in foreign jurisdictions where a valuation allowance is not applied[139] Liquidity and Capital Resources Assesses the company's cash flow, investment holdings, and borrowing capacity to meet future financial obligations Cash Flow Activities (in thousands) - Nine Months Ended | Cash Flow Activity | July 3, 2020 | June 28, 2019 | | :------------------------------------------ | :----------- | :------------ | | Cash and cash equivalents, beginning of period | $75,519 | $94,676 | | Net cash provided by operating activities | $96,994 | $28,277 | | Net cash used in investing activities | $(31,970) | $(33,060) | | Net cash used in financing activities | $(8,462) | $(4,792) | | Foreign currency effect on cash | $(211) | $164 | | Cash and cash equivalents, end of period | $131,870 | $85,265 | - Net cash provided by operating activities significantly increased to $97.0 million for the nine months ended July 3, 2020, from $28.3 million in the prior year. This was driven by a lower net loss and positive changes in operating assets and liabilities, including decreases in prepaid expenses, inventories, and accounts receivable[141][142] - Cash used in investing activities was $32.0 million for the nine months ended July 3, 2020, primarily due to purchases of short-term investments and capital expenditures, partially offset by proceeds from sales/maturities of short-term investments and a divested business. Cash used in financing activities was $8.5 million, mainly for stock repurchases for tax withholdings, long-term debt payments, and finance lease payments[144][146] - As of July 3, 2020, the company held $131.9 million in cash and cash equivalents, $133.2 million in liquid short-term investments, and had $160.0 million in borrowing capacity under its Revolving Facility. Undistributed earnings of certain foreign subsidiaries ($36.5 million) are indefinitely reinvested[148] - Management believes current cash, investments, operating cash flow, and revolving credit facility will be sufficient to meet working capital requirements for at least the next 12 months. Additional capital may be raised through equity or debt if needed[149] Recent Accounting Pronouncements Refers to detailed information on recently adopted and issued accounting standards - Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies for information on recent accounting pronouncements[151] Off-Balance Sheet Arrangements Confirms the absence of any off-balance sheet arrangements as of the reporting date - As of July 3, 2020, the company did not have any off-balance sheet arrangements[152] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section outlines the company's exposure to market risks, primarily focusing on interest rate risk associated with its cash, investments, and variable-rate debt, as well as foreign exchange rate risk. It also notes the impact of common stock price fluctuations on the warrant liability Interest rate risk Evaluates the company's exposure to interest rate fluctuations on its investment portfolio and variable-rate debt - The company's investment portfolio, consisting of cash and diversified investments, is exposed to fluctuating interest rates, but a 10% change is not expected to materially impact financial position or results. The company does not engage in trading or speculative financial instruments[154] - Exposure to interest rate risk also stems from variable-rate debt under the Credit Agreement. As of July 3, 2020, with $667.8 million outstanding, a 1% change in the annual interest rate would increase or decrease annual interest expense by $6.7 million[155] Foreign currency risk Assesses the company's limited exposure to foreign currency exchange rate fluctuations and their potential impact on product demand - The company has limited exposure to foreign currency exchange rates as international customer agreements are primarily denominated in U.S. dollars. Increases in the U.S. dollar's value could make products more expensive, potentially impacting demand. A 10% change in foreign currency exchange rates is not expected to materially impact financial position or results[156] ITEM 4. CONTROLS AND PROCEDURES This section details the evaluation of the company's disclosure controls and procedures, confirming their effectiveness as of July 3, 2020. It also states that there were no material changes in internal control over financial reporting during the fiscal quarter and acknowledges the inherent limitations of any control system Evaluation of Disclosure Controls and Procedures Confirms the effectiveness of the company's disclosure controls and procedures as evaluated by management - As of July 3, 2020, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[157] Changes in Internal Control over Financial Reporting States that no material changes occurred in internal control over financial reporting during the fiscal quarter - There were no changes to internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[158] Limitations on Controls Acknowledges the inherent limitations of any control system in providing absolute assurance against misstatements or fraud - The company acknowledges that control systems, regardless of design, are based on judgments and assumptions and cannot provide absolute assurance that all objectives will be met or that all misstatements or fraud will be detected[159] PART II—OTHER INFORMATION Part II of the 10-Q report covers other information not included in the financial statements, such as legal proceedings, risk factors, unregistered sales of equity securities and use of proceeds, and a list of exhibits. It also includes the required signatures for the report ITEM 1. LEGAL PROCEEDINGS Refers to the detailed disclosures on legal proceedings and commitments within the financial statement notes - Information regarding legal proceedings is cross-referenced to Note 13 - Commitments and Contingencies in the Condensed Consolidated Financial Statements[162] ITEM 1A. RISK FACTORS Highlights the inherent risks in the company's business and references prior disclosures on risk factors - The company's business involves a high degree of risk. No material changes to the risk factors described in the 2019 Annual Report on Form 10-K have occurred as of the date of this report, except as discussed in previous quarterly reports[163] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section provides details on the company's unregistered sales of equity securities and the use of proceeds, specifically focusing on issuer purchases of equity securities related to tax withholdings on employee restricted stock awards Issuer Purchases of Equity Securities Details the company's purchases of equity securities, primarily for tax withholdings on employee restricted stock awards Issuer Purchases of Equity Securities - Fiscal Quarter Ended July 3, 2020 | Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | | :------------------------ | :------------------------------------------ | :------------------------------------- | | April 4, 2020-May 1, 2020 | — | $— | | May 2, 2020-May 29, 2020 | 21,566 | $28.18 | | May 30, 2020-July 3, 2020 | — | $— | | Total | 21,566 | $28.18 | - The purchases represent shares withheld from employees to cover tax withholdings on vested restricted stock awards, using a 'withhold to cover' method. The average prices are based on the fair market prices used for valuing withheld shares[165] ITEM 6. EXHIBITS Provides a comprehensive list of exhibits filed with the report, including corporate documents and certifications Exhibits List | Exhibit Number | Description | | :------------- | :---------- | | 3.1 | Fifth Amended and Restated Certificate of Incorporation | | 3.2 | Third Amended and Restated Bylaws | | 31.1 | Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. | | 31.2 | Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. | | 32.1 | Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a 14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350. | | 101 | Inline XBRL financial statements and notes | | 104 | Inline XBRL cover page | SIGNATURES Lists the principal executive and financial officers who signed the Quarterly Report on Form 10-Q - The Quarterly Report on Form 10-Q was signed on July 30, 2020, by Stephen G. Daly, President and Chief Executive Officer, and John F. Kober, Senior Vice President and Chief Financial Officer[171]