MACOM(MTSI) - 2023 Q4 - Annual Report

Part I Business MACOM designs and manufactures high-performance semiconductor products for I&D, Data Center, and Telecom, utilizing a hybrid manufacturing model and expanding through strategic acquisitions - MACOM's business focuses on designing and manufacturing semiconductor products for Industrial and Defense (I&D), Data Center, and Telecommunications (Telecom) markets[15] - The company employs a hybrid manufacturing model, integrating internal fabrication facilities, including a U.S. DoD-accredited 'Trusted Foundry', with external partners[17][18][19] - Sales to distributors constituted 24.0% of revenue in fiscal 2023, a decline from 30.9% in 2022 and 35.0% in 2021[41] - In fiscal 2023, MACOM completed the acquisitions of Linearizer Technology, Inc. and OMMIC SAS (MESC Acquisition) to enhance design expertise and expand its European presence[76][77] - As of September 29, 2023, the company employed approximately 1,500 individuals worldwide, with a voluntary attrition rate of about 10% in fiscal year 2023[63][66] Risk Factors The company faces significant risks from semiconductor industry cyclicality, supply chain vulnerabilities, intense competition, international operations, and acquisition integration challenges - The semiconductor industry is highly cyclical, facing significant downturns, rapid technological change, and price erosion that can impact revenue and profitability[82] - International sales comprised 51.7% of revenue in FY2023, with sales to China and the Asia Pacific region at 20% and 14% of total sales, respectively, exposing the company to geopolitical and trade risks[109] - The company faces intense competition from major players such as ADI, Broadcom, Qorvo, and Skyworks, who may possess superior financial and technical resources[114][116] - Acquisitions present numerous risks, including integration difficulties, potential loss of key personnel, and failure to achieve anticipated synergies[117][119] - As of September 29, 2023, John and Susan Ocampo beneficially owned 23.0% of the common stock, enabling significant influence over corporate matters[161] Unresolved Staff Comments The company reports no unresolved staff comments - None[168] Properties MACOM's primary operations are based in a leased Lowell, Massachusetts facility, supplemented by other key leased sites for R&D, manufacturing, and sales Major Leased Facilities | Site | Major Activity | Square Footage | Lease Expiration | | :--- | :--- | :--- | :--- | | Lowell, Massachusetts | A, P&F, T&A, AE, S&M and RT | 281,700 | October 2043 | | Limeil-Brévannes, France | A, P&F, T&A, S&M and RT | 164,752 | October 2024 | | Newport Beach, California | R&D, AE and S&M | 57,412 | December 2029 | | Ann Arbor, Michigan | P&F, R&D and T&A, RT | 50,335 | May 2026 | | Nashua, New Hampshire | R&D, T&A, P&F and RT | 33,750 | December 2024 | Legal Proceedings The company is not involved in any pending legal proceedings expected to materially impact its business, financial condition, or cash flows - The company was not involved in any pending legal proceedings expected to have a material adverse effect on its business[172] Mine Safety Disclosures This item is not applicable to the company - Not applicable[174] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities MACOM's common stock, listed on Nasdaq, significantly outperformed key indices over five years, with limited share repurchases for tax obligations - A $100 investment in MACOM stock on September 28, 2018, would be worth $396.02 by September 29, 2023, outperforming the NASDAQ Composite Index ($171.65) and the PHLX Semiconductor Index ($251.68)[177] - In the fourth quarter of fiscal 2023, the company purchased 1,864 shares at an average price of $74.78 per share solely for employee tax withholding on vested restricted stock awards, not as part of a public repurchase program[178][179] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2023 saw a 4.0% revenue decrease to $648.4 million due to Telecom market downturn, offset by I&D and Data Center growth, while maintaining strong liquidity for strategic acquisitions Results of Operations Fiscal 2023 revenue decreased 4.0% to $648.4 million, primarily due to a 24.1% decline in Telecom, resulting in $91.6 million net income, significantly lower than prior year's $440.0 million due to one-time gains Financial Performance Summary (in thousands) | Metric | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Revenue | $648,407 | $675,170 | $606,920 | | Gross Profit | $385,797 | $406,181 | $341,855 | | Gross Margin | 59.5% | 60.2% | 56.3% | | Income from Operations | $107,400 | $132,674 | $81,002 | | Net Income | $91,577 | $439,955 | $37,973 | | Diluted EPS | $1.28 | $6.18 | $0.54 | Revenue by Market - FY2023 vs FY2022 (in thousands) | Market | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Industrial & Defense | $317,128 | $294,341 | 7.7% | | Data Center | $146,982 | $138,127 | 6.4% | | Telecom | $184,297 | $242,702 | (24.1)% | | Total | $648,407 | $675,170 | (4.0)% | Revenue by Market - FY2022 vs FY2021 (in thousands) | Market | FY 2022 | FY 2021 | % Change | | :--- | :--- | :--- | :--- | | Telecom | $242,702 | $188,391 | 28.8% | | Industrial & Defense | $294,341 | $280,221 | 5.0% | | Data Center | $138,127 | $138,308 | (0.1)% | | Total | $675,170 | $606,920 | 11.3% | - FY2022 net income of $440.0 million included a $118.2 million gain on an equity investment sale and a $202.8 million tax benefit from a valuation allowance release[202][224][225] Liquidity and Capital Resources As of September 29, 2023, MACOM maintained strong liquidity with $174.0 million cash and $340.6 million short-term investments, sufficient to meet future needs including the $75.0 million Wolfspeed RF business acquisition Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $166,917 | $176,982 | | Net cash provided by (used in) investing activities | $36,341 | $(182,861) | | Net cash used in financing activities | $(149,020) | $(28,908) | - In August 2023, the company repaid the $120.8 million outstanding principal balance of its Term Loans using cash-on-hand[232][234] - The company has a definitive agreement to acquire Wolfspeed's RF business, involving a $75.0 million cash payment expected in Q1 fiscal 2024 from available cash[235] Contractual Cash Obligations as of Sep 29, 2023 (in thousands) | Obligation | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term Debt (Principal & Interest) | $452,813 | $1,125 | $451,688 | $— | $— | | Lease Obligations (Finance & Operating) | $95,846 | $12,049 | $17,516 | $14,370 | $51,911 | | Purchase Commitments | $103,462 | $72,516 | $10,447 | $3,481 | $17,018 | | Total | $652,121 | $85,690 | $479,651 | $17,851 | $68,929 | Quantitative and Qualitative Disclosures About Market Risk The company's market risks, primarily interest rate and foreign currency, are limited due to fixed-rate debt, repaid variable loans, and U.S. dollar-denominated international agreements - Interest rate risk is limited to the company's investment portfolio, with 2026 Convertible Notes at a fixed rate and variable-rate Term Loans fully repaid in August 2023[241][242] - Foreign currency risk is limited as most international customer agreements are U.S. dollar-denominated, with a hypothetical 10% change not expected to have a material impact[243] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for fiscal year 2023, including balance sheets, income statements, and cash flows, with an unqualified auditor's opinion from Deloitte & Touche LLP Consolidated Balance Sheet Data (in thousands) | Account | Sep 29, 2023 | Sep 30, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $173,952 | $119,952 | | Short-term investments | $340,574 | $466,580 | | Total current assets | $761,193 | $813,083 | | Total assets | $1,553,244 | $1,571,817 | | Liabilities & Equity | | | | Total current liabilities | $83,525 | $97,214 | | Long-term debt | $447,134 | $565,920 | | Total liabilities | $605,644 | $729,069 | | Total stockholders' equity | $947,600 | $842,748 | Consolidated Statement of Operations Data (in thousands) | Account | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Revenue | $648,407 | $675,170 | $606,920 | | Gross profit | $385,797 | $406,181 | $341,855 | | Income from operations | $107,400 | $132,674 | $81,002 | | Net income | $91,577 | $439,955 | $37,973 | - Deloitte & Touche LLP identified the reserve for excess and obsolete inventory as a critical audit matter due to significant management estimates[256] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of September 29, 2023, with an unqualified audit opinion from Deloitte & Touche LLP, excluding recent acquisitions - Management concluded that disclosure controls and procedures were effective as of September 29, 2023[429] - Management's assessment found internal control over financial reporting effective, excluding Linearizer and OMMIC S.A.S. acquisitions, which represented 3.8% of total assets and 2.3% of total revenue[432][433] - Deloitte & Touche LLP provided an unqualified audit opinion on the effectiveness of the company's internal control over financial reporting as of September 29, 2023[438] Other Information This section discloses the adoption of Rule 10b5-1 trading plans by several directors and Section 16 officers in Q4 fiscal 2023 to prearrange securities transactions - In the fourth quarter of fiscal 2023, several executive officers, including CEO Stephen Daly and CFO John Kober, adopted Rule 10b5-1 trading plans to manage company stock holdings[446][447] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[451] Executive Compensation Executive compensation information is incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[454] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan details are incorporated by reference from the 2024 proxy statement, with 5,792,015 securities available for future issuance Equity Compensation Plan Information as of September 29, 2023 | Plan Category | Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity Compensation Plans Approved by Security Holders | 15,000 | $16.06 | 5,792,015 | | Equity Compensation Plans Not Approved by Security Holders | — | — | — | | Total | 15,000 | $16.06 | 5,792,015 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[458] Principal Accounting Fees and Services Details on principal accounting fees and services are incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[459] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements from Item 8 and provides a comprehensive list of exhibits filed with the Form 10-K, including key corporate documents - This section lists all financial statements and exhibits filed as part of the Annual Report on Form 10-K[461][462] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[468]