MACOM(MTSI) - 2020 Q4 - Annual Report

PART I This section details the company's business, associated risks, legal status, properties, and regulatory compliance ITEM 1. BUSINESS MACOM Technology Solutions Holdings, Inc. designs and manufactures semiconductor products for Telecommunications, Industrial and Defense, and Data Center applications. The company leverages over 70 years of expertise, operating fabrication, manufacturing, assembly, and test facilities globally. Its strategy focuses on developing high-performance products, strengthening customer relationships, and increasing market share in its primary markets, supported by both internal and external manufacturing capabilities and continuous R&D investment - MACOM designs and manufactures semiconductor products for three primary markets: Telecommunications (Telecom), Industrial and Defense (I&D), and Data Center applications[16] - The company has over 70 years of application expertise with silicon, gallium arsenide (GaAs), and indium phosphide (InP) fabrication, manufacturing, assembly, and test facilities across North America, Europe, and Asia[16] - MACOM's growth strategy is centered on strengthening customer relationships, securing more design wins, and expanding market share by growing its product portfolio and technology base[17] Overview Provides a general introduction to the company's operations and strategic focus Research and Development Details the company's investment and activities in research and development Our Markets and Products Describes the company's target markets and product offerings Sales and Marketing Outlines the company's strategies for sales and marketing Customers Identifies key customer relationships and segments Competition Analyzes the competitive landscape and market positioning Backlog and Inventory Discusses the company's order backlog and inventory management Intellectual Property Covers the company's intellectual property assets and protection strategies Manufacturing, Sources of Supply and Raw Materials Describes manufacturing processes, supply chain, and raw material sourcing Quality Assurance Details the company's quality control and assurance processes Environmental Regulation Addresses compliance with environmental laws and regulations Export Regulations Explains adherence to export control regulations Employees Provides information on the company's workforce History and Recent Developments Summarizes the company's historical background and recent operational changes COVID-19 Impact Assesses the impact of the COVID-19 pandemic on business operations Available Information Indicates where additional company information can be accessed ITEM 1A. RISK FACTORS The company faces significant risks across its operations, including dependence on new product development for revenue growth, potential gross margin reductions due to underutilization or price competition, and fluctuating operating results. Key risks also involve declining demand in primary markets, reliance on a limited number of customers, and uncertainties in order and shipment forecasting. The COVID-19 pandemic has introduced substantial economic uncertainty, impacting operations, supply chains, and customer demand. Production risks include manufacturing and supply chain disruptions, limited component sources, and potential catastrophic losses at facilities. Intellectual property and new technology risks involve unsuccessful R&D investments and infringement claims. International operations expose the company to regulatory, geopolitical, and currency risks, while government regulations, including export controls and environmental laws, pose compliance and financial challenges. Strategic and personnel risks include intense competition, loss of key personnel, and difficulties in managing growth or integrating acquisitions - Revenue growth and gross margin are highly dependent on the successful and timely development and release of new products that meet customer expectations and offset price erosion[73] - The company's operating results are subject to significant period-to-period fluctuations due to factors like economic conditions, customer order changes, manufacturing issues, and competitive pressures[76] - The COVID-19 pandemic has created significant economic uncertainty and volatility, impacting operations, supply chains, customer demand, and potentially leading to increased credit risks, asset impairments, and adverse effects on capital resources[69][84][85] Risks Relating to General Business Conditions Discusses risks associated with economic conditions and operational fluctuations Risks Relating to Production Operations Covers risks related to manufacturing, supply chain, and facility operations Risks Relating to Research and Development, Intellectual Property and New Technologies Addresses risks in R&D, intellectual property, and new technology adoption Risks Relating to International Operations Examines risks from global operations, including regulatory and geopolitical factors Risks Relating to Government Regulations Details risks associated with compliance to government and environmental regulations Risks Relating to Business Strategies and Personnel Covers risks related to competition, key personnel, and growth management Risks Relating to Ownership of our Common Stock Discusses risks pertinent to the ownership and trading of common stock ITEM 1B. UNRESOLVED STAFF COMMENTS. The company reported no unresolved staff comments from the SEC - No unresolved staff comments were reported[150] ITEM 2. PROPERTIES. The company's principal executive offices are in a leased facility in Lowell, Massachusetts, which also serves as a major site for administration, production, fabrication, test, and assembly. Other significant leased facilities are located in Newport Beach, Santa Clara, Ann Arbor, Cork (Ireland), Ithaca, and Nashua, supporting R&D, production, sales, and engineering functions - The principal executive offices are in a leased facility in Lowell, Massachusetts, which is also a major site for Production and Fabrication (P&F), Test and Assembly (T&A), and Research and Development (R&D)[151][152] Major Leased Facilities and Activities (as of October 2, 2020) | Site | Major Activity | Square Footage | Lease Expiration | | :-------------------- | :----------------------------- | :------------- | :--------------- | | Lowell, Massachusetts | A, P&F, T&A, AE, S&M and RT | 281,700 | October 2038 | | Newport Beach, California | R&D, AE and S&M | 68,435 | December 2029 | | Santa Clara, California | R&D, AE | 59,625 | October 2024 | | Ann Arbor, Michigan | P&F, R&D and T&A, RT | 50,335 | May 2021 | | Cork, Ireland | A, R&D, S&M, AE and RT | 21,422 | August 2026 | | Ithaca, New York | R&D | 20,600 | December 2025 | | Nashua, New Hampshire | R&D, T&A, P&F, RT | 17,000 | December 2021 | ITEM 3. LEGAL PROCEEDINGS. The company is subject to various commercial and employment disputes, as well as intellectual property infringement claims, which could lead to litigation and significant costs. As of the filing date, no pending legal proceedings were deemed to have a material adverse effect on the business, operating results, financial condition, or cash flows, beyond those discussed in the consolidated financial statements - The company is subject to commercial and employment disputes, and intellectual property infringement claims[154] - As of the filing date, no pending legal proceedings were believed to have a material adverse effect on the business, operating results, financial condition, or cash flows[154] ITEM 4. MINE SAFETY DISCLOSURES. This item is not applicable to the company - Mine Safety Disclosures are not applicable to MACOM Technology Solutions Holdings, Inc[156] PART II This section covers market information, selected financial data, management's discussion, and market risk disclosures ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. The company's common stock is listed on the Nasdaq Global Select Market under the symbol "MTSI." As of November 12, 2020, there were approximately 11 stockholders of record. The stock price performance graph shows the cumulative return of MACOM's common stock compared to the NASDAQ Composite Index and the PHLX Semiconductor Index from October 2, 2015, to October 2, 2020. The company also reported limited issuer purchases of equity securities, primarily for tax withholdings on employee restricted stock awards - MACOM's common stock is listed on the Nasdaq Global Select Market under the symbol "MTSI" since March 15, 2012[157] - As of November 12, 2020, there were approximately 11 stockholders of record[157] Stock Price Performance Graph Illustrates the company's stock performance against market indices Issuer Purchases of Equity Securities Details the company's repurchases of its own equity securities Issuer Purchases of Equity Securities (Fiscal Year 2020) | Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | | :--------------------------- | :----------------------------------- | :--------------------------- | :---------------------------------------------------------------------------------------- | :-------------------------------------------------------------------------------------------------------------------- | | July 4, 2020—July 31, 2020 | 662 | $36.75 | — | — | | August 1, 2020—August 28, 2020 | 3,313 | $38.39 | — | — | | August 29, 2020—October 2, 2020 | — | — | — | — | | Total | 3,975 | $38.12 | — | — | ITEM 6. SELECTED FINANCIAL DATA. This section provides a summary of selected financial data for MACOM Technology Solutions Holdings, Inc. for the fiscal years 2016 through 2020, including statements of operations data and consolidated balance sheet data. The fiscal year 2020 included 53 weeks, while other presented fiscal years had 52 weeks. The historical results are not necessarily indicative of future performance Statements of Operations Data (in thousands, except per share data) | Fiscal Years | 2020 | 2019 | 2018 | 2017 | 2016 | | :-------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Revenue | $ 530,037 | $ 499,708 | $ 570,398 | $ 698,772 | $ 544,338 | | Gross profit | 270,166 | 220,708 | 245,706 | 326,884 | 281,609 | | Income (loss) from operations | 3,388 | (380,376) | (106,520) | (16,084) | 13,248 | | Loss before income taxes | (41,562) | (423,153) | (155,235) | (49,505) | (21,571) | | Income tax expense (benefit) | 4,516 | (39,355) | (21,473) | 100,911 | (17,983) | | Loss from continuing operations | (46,078) | (383,798) | (133,762) | (150,416) | (3,588) | | Net (loss) income attributable to common stockholders | $ (46,078) | $ (383,798) | $ (139,977) | $ (169,493) | $ 1,434 | | Basic (loss) income per common share: Net (loss) income - basic | $ (0.69) | $ (5.84) | $ (2.16) | $ (2.79) | $ 0.03 | | Diluted (loss) income per common share: Net (loss) income - diluted | $ (0.69) | $ (5.84) | $ (2.57) | $ (2.79) | $ 0.03 | Consolidated Balance Sheet Data (in thousands) | As of | October 2, 2020 | September 27, 2019 | September 28, 2018 | September 29, 2017 | September 30, 2016 | | :-------------------------------- | :-------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Cash and cash equivalents | $ 129,441 | $ 75,519 | $ 94,676 | $ 130,104 | $ 332,977 | | Short-term investments | 203,711 | 101,226 | 98,221 | 84,121 | 23,776 | | Working capital | 386,569 | 323,746 | 351,856 | 445,778 | 520,794 | | Total assets | 1,146,428 | 1,105,574 | 1,482,495 | 1,637,123 | 1,188,551 | | Long-term debt and finance lease obligations and other, less current portion | 681,166 | 684,778 | 687,395 | 678,746 | 576,345 | | Stockholders' equity | $ 300,146 | $ 313,896 | $ 668,675 | $ 777,374 | $ 462,784 | - Fiscal year 2020 included 53 weeks, while all other fiscal years presented included 52 weeks[164] ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This section provides a detailed analysis of MACOM's financial condition and results of operations, highlighting revenue trends across its primary markets (Telecom, I&D, Data Center), changes in gross profit and operating expenses, and the impact of restructuring activities. It also covers critical accounting policies, liquidity, capital resources, and contractual obligations. The company experienced revenue growth in fiscal year 2020, driven by Telecom and Data Center, while I&D revenue decreased. Significant restructuring efforts in 2019 led to reduced operating expenses in 2020. The company maintains a strong liquidity position with cash, short-term investments, and available credit - MACOM designs and manufactures semiconductor products for Telecommunications, Industrial and Defense, and Data Center applications[167][168] - The company's core strategy is to develop and innovate high-performance products addressing technical challenges in its primary markets[173] - Future revenue growth is expected to be driven by 5G deployments in Telecom, expanding product portfolio in I&D, and adoption of cloud-based services and data center architecture upgrades (100G, 200G, 400G, 800G interconnects) in Data Center[173][174][175] OVERVIEW Provides a high-level summary of the company's financial performance and strategic direction Basis of Presentation Explains the accounting principles and methods used in financial reporting Description of Our Revenue Details the sources and recognition policies for the company's revenue COVID-19 Impact Assesses the impact of the COVID-19 pandemic on financial condition and operations CRITICAL ACCOUNTING POLICIES AND ESTIMATES Outlines key accounting policies and significant management estimates RESULTS OF OPERATIONS Analyzes the company's financial performance over the reporting period LIQUIDITY AND CAPITAL RESOURCES Discusses the company's cash flow, funding, and financial flexibility OFF-BALANCE SHEET ARRANGEMENTS Describes financial arrangements not recorded on the balance sheet CONTRACTUAL OBLIGATIONS Details the company's future payment commitments under various contracts OTHER MATTERS Covers additional relevant financial and operational information ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The company is exposed to market risks primarily from interest rate fluctuations on its cash, short-term investments, and variable-rate debt, as well as foreign exchange rate risk. A 1% change in interest rates would impact annual interest expense by $6.7 million. While most international customer agreements are in U.S. dollars, currency fluctuations can affect product competitiveness and manufacturing costs. The warrant liability's value is also subject to common stock price changes, though most warrants were exercised post-fiscal year end - The company is exposed to interest rate risk on its cash, short-term investments, and variable-rate debt, and foreign exchange rate risk[234][235][236][237] - A 1% increase or decrease in the annual interest rate on outstanding debt would change annual interest expense by $6.7 million[236] - The value of the warrant liability is based on the underlying common stock price, and changes could significantly impact warrant liability expense. Most warrants were exercised on November 11, 2020[234] Interest rate risk Analyzes the company's exposure to fluctuations in interest rates Foreign currency risk Assesses the impact of foreign exchange rate movements on financial results ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. This section presents the audited consolidated financial statements for MACOM Technology Solutions Holdings, Inc., including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows for the fiscal years ended October 2, 2020, September 27, 2019, and September 28, 2018. It also includes the Report of Independent Registered Public Accounting Firm, critical audit matters, and detailed notes to the financial statements covering significant accounting policies, revenue disaggregation, investments, fair value measurements, inventories, property and equipment, debt, leases, employee benefits, accrued liabilities, commitments, restructurings, product warranties, impairments, intangible assets, income taxes, share-based compensation, stockholders' equity, related-party transactions, divested businesses, earnings per share, supplemental cash flow information, and geographic/customer information - The financial statements include Consolidated Balance Sheets, Statements of Operations, Comprehensive Loss, Stockholders' Equity, and Cash Flows for the fiscal years ended October 2, 2020, September 27, 2019, and September 28, 2018[239] - Deloitte & Touche LLP issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of October 2, 2020[243][244] - A critical audit matter identified was the reserve for excess quantities and obsolete inventory due to significant estimates and assumptions regarding expected demand, especially given the cyclical nature of the semiconductor industry[249][250] Report of Independent Registered Public Accounting Firm Presents the auditor's opinion on the financial statements and internal controls MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS Provides a snapshot of the company's assets, liabilities, and equity at specific dates MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Details the company's revenues, expenses, and net income or loss over a period MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Reports all changes in equity during a period, except those from transactions with owners MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Shows changes in the equity section of the balance sheet over a period MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Summarizes cash inflows and outflows from operating, investing, and financing activities NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Provides detailed explanations and additional information for items in the financial statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The company reported no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure were reported[433] ITEM 9A. CONTROLS AND PROCEDURES. Management concluded that the company's disclosure controls and procedures were effective as of October 2, 2020. The internal control over financial reporting was also assessed as effective based on the COSO framework. Deloitte & Touche LLP audited and provided an unqualified opinion on the effectiveness of internal control over financial reporting. No material changes in internal control over financial reporting occurred during the fiscal quarter - Management concluded that disclosure controls and procedures were effective as of October 2, 2020[435] - Internal control over financial reporting was assessed as effective based on the COSO 2013 Framework[438] - Deloitte & Touche LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[439][444] Evaluation of Disclosure Controls and Procedures Assesses the effectiveness of controls ensuring timely and accurate public disclosures Management's Annual Report on Internal Control over Financial Reporting Management's assessment of the effectiveness of internal controls over financial reporting Changes in Internal Control over Financial Reporting Reports any material changes in the company's internal control over financial reporting Report of Independent Registered Public Accounting Firm Presents the auditor's opinion on the effectiveness of internal control over financial reporting ITEM 9B. OTHER INFORMATION. The company reported no other information required by this item - No other information was reported[451] PART III This section covers corporate governance, executive compensation, security ownership, and accounting fees ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for the 2021 Annual Meeting of Stockholders. The company maintains a written code of business conduct and ethics applicable to all directors, officers, and employees, available on its website - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy statement[453] - The company has a written code of business conduct and ethics for directors, officers, and employees, available on its website[454] ITEM 11. EXECUTIVE COMPENSATION. Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for the 2021 Annual Meeting of Stockholders - Executive compensation information is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy statement[455] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Information on security ownership of beneficial owners and management, along with related stockholder matters, is incorporated by reference from the company's definitive proxy statement for the 2021 Annual Meeting of Stockholders. The company's equity compensation plans (2012 Omnibus Incentive Plan and 2012 Employee Stock Purchase Plan) have shares authorized for future issuance, with evergreen provisions allowing for annual increases - Security ownership information is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy statement[456] Equity Compensation Plan Information Details the company's equity-based compensation plans and share availability Equity Compensation Plan Information (as of October 2, 2020) | Plan Category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights(1) | (b) Weighted-average exercise price of outstanding options, warrants and rights(1) | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(2)(3) | | :------------------------------------------------ | :----------------------------------------------------------------------------------------------- | :--------------------------------------------------------------------------------- | :---------------------------------------------------------------------------------------------------------------------------------------------------- | | Equity Compensation Plans Approved by Security Holders | 1,606,356 | $14.27 | 20,677,326 | | Equity Compensation Plans Not Approved by Security Holders | — | — | — | | Total | 1,606,356 | $14.27 | 20,677,326 | - The 2012 Plan and ESPP include 'evergreen' provisions, allowing for annual increases in available shares for issuance[459][460] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive proxy statement for the 2021 Annual Meeting of Stockholders - Information on related party transactions and director independence is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy statement[461] ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Information regarding principal accounting fees and services is incorporated by reference from the company's definitive proxy statement for the 2021 Annual Meeting of Stockholders - Information on principal accounting fees and services is incorporated by reference from the 2021 Annual Meeting of Stockholders proxy statement[462] PART IV This section includes exhibits, financial statement schedules, and signatures ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. This section lists the financial statements included in Item 8 and provides a comprehensive list of exhibits filed with the Annual Report on Form 10-K. These exhibits include various agreements, corporate documents, and certifications, many of which are incorporated by reference from previous SEC filings - Financial statements are included in Item 8 of this Annual Report[464] - A comprehensive list of exhibits, including various agreements, corporate documents, and certifications, is filed herewith and incorporated by reference[465][466][467][468] ITEM 16. FORM 10-K SUMMARY. The company reported no Form 10-K summary - No Form 10-K summary was provided[469] SIGNATURES The Annual Report was duly signed on behalf of MACOM Technology Solutions Holdings, Inc. by its President and Chief Executive Officer, Stephen G. Daly, and other authorized persons, including the Chief Financial Officer and members of the Board of Directors, on November 18, 2020 - The Annual Report was signed by Stephen G. Daly, President and Chief Executive Officer, and other authorized persons on November 18, 2020[472][473]