MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC. The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedOctober 2, 2020 filed with theUnited States Securities and Exchange Commission ("SEC") onNovember 18, 2020 (the "2020 Annual Report on Form 10-K"). In this document, the words "Company," "we," "our," "us," and similar terms refer only toMACOM Technology Solutions Holdings, Inc. and its consolidated subsidiaries, and not any other person or entity. "MACOM," "M/A-COM," "M/A-COM Technology Solutions," "M/A-COM Tech," "Partners in RF & Microwave" and related logos are trademarks ofMACOM Technology Solutions Holdings, Inc. All other brands and names listed are trademarks of their respective owners. Cautionary Note Regarding Forward-Looking Statements This Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Quarterly Report on Form 10-Q contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to our strategic plans and priorities, anticipated drivers of future revenue growth, industry trends, the potential impacts of COVID-19 on our future operations and results, our plans for use of our cash and cash equivalents, short-term investments and revolving credit facility, our ability to meet working capital requirements and other matters that do not relate strictly to historical facts. These statements are often identified by the use of words such as "anticipates," "believes," "could," "continue," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "seeks," "should," "targets," "will," "would" and similar expressions or variations. These statements are based on management's beliefs and assumptions as of the date of this Quarterly Report on Form 10-Q, based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and the 2020 Annual Report on Form 10-K. We caution the reader to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Overview We design and manufacture semiconductor products for Telecommunications ("Telecom"), Industrial and Defense ("I&D") and Data Center applications. Headquartered inLowell, Massachusetts , with operational facilities throughoutNorth America ,Europe andAsia , we design, develop and manufacture differentiated semiconductor products for customers who demand high performance, quality and reliability. We have more than 70 years of application expertise, combined with proficiencies in analog and mixed signal circuit design, compound semiconductor fabrication (including gallium arsenide, indium phosphide and specialized silicon), and back-end assembly and test. We offer a broad portfolio of thousands of standard and custom devices, which include integrated circuits ("IC"), multi-chip modules ("MCM"), diodes, amplifiers, switches and switch limiters, passive and active components and complete subsystems, across dozens of product lines serving over 6,000 end customers in three primary markets. Our semiconductor products are electronic components that our customers incorporate into larger electronic systems, such as, wireless communication systems including basestations, high capacity optical networks, radar, medical systems and test and measurement applications. Our primary markets are: (1) Telecom, which includes carrier infrastructure such as long-haul/metro, 5G and Fiber-to-the-X ("FTTx")/passive optical network ("PON"), among others; (2) I&D, which includes military and commercial radar, radio frequency ("RF") jammers, electronic countermeasures, communication data links, satellite communications and multi-market applications, which include industrial, medical, test and measurement and scientific applications; and (3) Data Center, which includes intra-Data Center, Data Center Interconnect 17 -------------------------------------------------------------------------------- ("DCI") applications, at 100G, 200G, 400G and higher speeds, enabled by our broad portfolio of analog ICs and photonic components for high speed optical module customers. COVID-19 Impact COVID-19, the disease caused by the most recently discovered coronavirus, has spread throughout areas of the world where we operate and resulted in authorities implementing numerous measures to try to contain the virus. As a result of these measures and the spread of COVID-19, we have modified our business practices and may further modify our practices as required, or as we determine appropriate. While these measures, as well as other disruptions, have impacted our operations, the operations of our customers and those of our respective vendors and suppliers, such impacts did not have a material impact on our consolidated operating results for the periods presented. Given the significant continued economic uncertainty and volatility created by the pandemic, it is difficult to predict the nature and extent of impacts on the demand for our products. The continued spread of COVID-19 could cause a further economic slowdown or recession and could result in adverse impacts to our overall business, such as increased credit and collectability risks, adverse impacts on our suppliers, asset impairments, declines in the value of our financial instruments and adverse impacts on our capital resources. The degree to which the COVID-19 pandemic impacts our future business, financial condition, results of operations, liquidity and cash flows will depend on future developments, which are highly uncertain and cannot be accurately predicted, including the duration and spread of the outbreak, its severity, actions taken to contain the virus or treat its impact, how quickly and to what extent normal operating conditions can resume, and the economic impact on local, regional, national and international markets. For additional information on risk factors that could impact our future results, please refer to the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and the 2020 Annual Report on Form 10-K. Description of Our Revenue Revenue. Our revenue is derived from sales of high-performance RF, microwave, millimeter wave, optical and photonic semiconductor products. We design, integrate, manufacture and package differentiated semiconductor products that we sell to customers through our direct sales organization, our network of independent sales representatives and our distributors. Our core strategy is to develop and innovate high-performance products that address our customers' most difficult technical challenges in our primary markets: Telecom,I&D and Data Center . We believe the primary drivers of our future revenue growth will include: •continued growth in the demand for high-performance analog, digital and optical semiconductors in our three primary markets; •introducing new products using advanced technologies, added features, higher levels of integration and improved performance; •increasing content of our semiconductor solutions in customers' systems through cross-selling our product lines; •leveraging our core strength and leadership position in standard, catalog products that service all of our end applications; and •engaging early with our lead customers to develop custom and standard products. We expect our revenue in the Telecom market to be driven by 5G deployments, with continued upgrades and expansion of communications equipment, and increasing adoption of our high-performance RF, millimeter wave, optical and photonic components. We expect our revenue in the I&D market to be driven by the expanding product portfolio that we offer which services applications such as test and measurement, satellite communications, civil and military radar, industrial, scientific and medical applications, further supported by growth in applications for our multi-market catalog products. We expect our revenue in the Data Center market to be driven by the adoption of cloud-based services and the upgrade of data center architectures to 100G, 200G, 400G and 800G interconnects, which we expect will drive adoption of higher speed optical and photonic components. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements. The preparation of financial statements, in conformity withU.S. GAAP, requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. 18 -------------------------------------------------------------------------------- By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and could be material if our actual or expected experience were to change unexpectedly. On an ongoing basis, we re-evaluate our estimates and judgments. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of the date of filing of this Quarterly Report on Form 10-Q with theSEC . These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. We base our estimates and judgments on our historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates and material effects on our operating results and financial position may result. The accounting policies which our management believes involve the most significant application of judgment or involve complex estimation, are inventories and associated reserves; goodwill and long-lived asset valuations and associated impairment assessments; revenue reserves; share-based compensation valuations and income taxes. Significant management judgment is required in our valuation of long-lived asset groups when assessing for potential impairment. These analyses are based on the creation of forecasts of future operating results that are used in the valuation, including estimation of (i) future cash flows, (ii) the long-term rate of growth for our business, (iii) the useful life over which cash flows will occur, (iv) terminal values, if applicable, and (v) the determination of our weighted average cost of capital, which is used to determine the discount rate. It is possible that these forecasts may change and our projections included in our forecasts of future results may prove to be inaccurate. If our actual results, or the forecasts and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur impairment charges. Our forecasts and the value of our long-lived asset groups could be adversely affected by, but not limited to, a change in strategy, the outcome of development activities, a significant slowdown in our primary markets, the semiconductor industry or worldwide economy, or a decline in the valuation of technology company stocks, including the valuation of our common stock. For additional information related to these and other accounting policies refer to Note 2 - Summary of Significant Accounting Policies to our Consolidated Financial Statements included in Item 8 of Part II, "Financial Statements and Supplementary Data," of the 2020 Annual Report on Form 10-K and Note 1 - Basis of Presentation and Summary of Significant Accounting Policies to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Results of Operations The following table sets forth, for the periods indicated, our statements of operations data (in thousands): Three Months Ended January 1, January 3, 2021 2020 Revenue$ 148,504 $ 119,097 Cost of revenue (1) 68,242 60,893 Gross profit 80,262 58,204 Operating expenses: Research and development (1)
36,936 35,158
Selling, general and administrative (1) 31,252 32,340
Restructuring charges (2) - 1,234
Total operating expenses 68,188 68,732
Income (loss) from operations 12,074 (10,528)
Other expense:
Warrant liability expense (3) (11,130) (4,087)
Interest expense (4,734) (8,621)
Other expense, net (4) (4,504) (3,740)
Total other expense, net (20,368) (16,448)
Loss before income taxes (8,294) (26,976)
Income tax expense 674 1,386
Net loss $ (8,968) $ (28,362)
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(1) Includes (a) Amortization expense related to intangible assets arising
from acquisitions and (b) Share-based compensation expense included in our
condensed consolidated statements of operations as set forth below (in
thousands):
Three Months Ended
January 1 , January 3,
2021 2020(a) Intangible amortization expense:
Cost of revenue $
3,877
Selling, general and administrative 8,116 8,654
(b) Share-based compensation expense:
Cost of revenue $
871
Research and development 3,554 2,907
Selling, general and administrative 5,706 4,281
(2) See Note 12 - Restructurings to our Condensed Consolidated Financial
Statements in this Quarterly Report on Form 10-Q.
(3) Represents changes in the fair value of common stock warrants recorded as
liabilities and adjusted each reporting period to fair value. See Note 9 -
Stockholders' Equity to our Condensed Consolidated Financial Statements in this
Quarterly Report on Form 10-Q for additional information.
(4) Includes $4.8 million and $3.7 million of losses for the three months ended
January 1, 2021 and January 3, 2020 , respectively, associated with our equity
method investment. See Note 3 - Investments to our Condensed Consolidated
Financial Statements in this Quarterly Report on Form 10-Q for additional
information.
The following table sets forth, for the periods indicated, our statements of operations data expressed as a percentage of our revenue:
Three Months Ended
January 1, January 3,
2021 2020
Revenue 100.0 % 100.0 %
Cost of revenue 46.0 51.1
Gross profit 54.0 48.9
Operating expenses:
Research and development 24.9 29.5
Selling, general and administrative
21.0 27.2
Restructuring charges - 1.0
Total operating expenses 45.9 57.7
Income (loss) from operations 8.1 (8.8)
Other expense:
Warrant liability expense
(7.5) (3.4)
Interest expense (3.2) (7.2)
Other expense, net (3.0) (3.1)
Total other expense, net (13.7) (13.8)
Loss before income taxes
(5.6) (22.7)
Income tax expense 0.4 1.2
Net loss (6.0) % (23.8) %
Comparison of the Three Months Ended January 1, 2021 to the Three Months Ended
January 3, 2020
Revenue. Our revenue increased by $29.4 million , or 24.7%, to $148.5 million for
the three months ended January 1, 2021 , from $119.1 million for the three months
ended January 3, 2020 . The increase in revenue in the three months ended
January 1, 2021 is described by end market in the following paragraphs.
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Revenue from our primary markets, the percentage of change between the periods
presented, and revenue by primary markets expressed as a percentage of total
revenue in the periods presented were (in thousands, except percentages):
Three Months Ended
January 1, January 3, %
2021 2020 Change
Telecom $ 51,532 $ 45,602 13.0 %
Industrial & Defense 61,618 50,482 22.1 %
Data Center 35,354 23,013 53.6 %
Total $ 148,504 $ 119,097 24.7 %
Telecom 34.7 % 38.3 %
Industrial & Defense 41.5 % 42.4 %
Data Center 23.8 % 19.3 %
Total 100.0 % 100.0 %
In the three months ended January 1, 2021 , our Telecom market revenue increased
by $5.9 million , or 13.0%, compared to the three months ended January 3, 2020 .
The increase for the three months ended January 1, 2021 was primarily driven by
increased sales of legacy products, products targeting fiber to the home and
licensing revenue, offset by a decrease in carrier-based optical semiconductor
products, including those targeted for 5G applications.
In the three months ended January 1, 2021 , our I&D market revenue increased by
$11.1 million , or 22.1%, compared to the three months ended January 3, 2020 . The
increase in the three months ended January 1, 2021 was primarily related to new
program wins and expansion of our RF and microwave product lines.
In the three months ended January 1, 2021 , our Data Center market revenue
increased by $12.3 million , or 53.6%, compared to the three months ended
January 3, 2020 . The increase in revenue for the three months ended January 1,
2021 was primarily due to increased sales of our high-performance analog Data
Center products.
Gross profit. Gross margin was 54.0% and 48.9% for the three months ended
January 1, 2021 and January 3, 2020 , respectively. Gross profit was $80.3
million and $58.2 million for the three months ended January 1, 2021 and
January 3, 2020 , respectively. Gross profit increased for the three months ended
January 1, 2021 as compared to the three months ended January 3, 2020 primarily
as a result of increased sales, favorable product mix, production efficiencies
and the recognition of licensing revenue during fiscal year 2021.
Research and development. Research and development expense increased by $1.8
million , or 5.1%, to $36.9 million , or 24.9% of our revenue, for the three
months ended January 1, 2021 , compared with $35.2 million , or 29.5% of our
revenue, for the three months ended January 3, 2020 . Research and development
expense increased in the three months ended January 1, 2021 primarily as a
result of increased R&D activities including supplies, and an increase in
share-based compensation expense offset by lower payroll-related costs.
Selling, general and administrative. Selling, general and administrative expense
decreased by $1.1 million , or 3.4%, to $31.3 million , or 21.0% of our revenue,
for the three months ended January 1, 2021 , compared with $32.3 million , or
27.2% of our revenue, for the three months ended January 3, 2020 . Selling,
general and administrative expense decreased in the three months ended
January 1, 2021 primarily due to lower payroll-related costs, professional
service fees and other discretionary spending, offset by an increase in
share-based compensation expense.
Restructuring charges. There were no restructuring charges incurred during the
three months ended January 1, 2021 as compared to $1.2 million for the three
months ended January 3, 2020 . All restructuring actions were completed as of
October 2, 2020 . For additional information refer to Note 12 - Restructurings to
our Condensed Consolidated Financial Statements in this Quarterly Report on Form
10-Q.
Warrant liability expense. Our warrant liability resulted in an expense of $11.1
million for the three months ended January 1, 2021 , compared to an expense of
$4.1 million for the three months ended January 3, 2020 . The difference between
periods was driven by a change in the estimated fair value of common stock
warrants, primarily driven by the increase in the underlying price of our common
stock, which was recorded as a liability at fair value. During November 2020 ,
all of the warrants were exercised and 857,631 shares of common stock were
issued. As of January 1, 2021 , there are no remaining common stock warrants
outstanding. For additional information refer to Note 9 - Stockholders' Equity
to our Condensed Consolidated Financial Statements in this Quarterly Report on
Form 10-Q.
Provision for income taxes. Our income tax expense and effective income tax
rates for the periods indicated were (in thousands, except percentages):
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Three Months Ended
January 1, January 3,
2021 2020
Income tax expense 674 1,386
Effective income tax rate (8.1) % (5.1) %
Our estimated annual effective tax rate for the year ended October 1, 2021 is
expected to be negative, adjusted for discrete taxation matters arising during
the interim periods.
The difference between the U.S. federal statutory income tax rate of 21% and our
effective income tax rate for the three months ended January 1, 2021 and the
three months ended January 3, 2020 was primarily driven by the continuation of a
full valuation allowance against any benefit associated with U.S. losses and
income taxed in foreign jurisdictions at generally lower tax rates, where we are
not in a valuation allowance because it is expected that we will be in a taxable
income position. For additional information refer to Note 14 - Income Taxes to
our Condensed Consolidated Financial Statements in this Quarterly Report on Form
10-Q.
Liquidity and Capital Resources
The following table summarizes our cash flow activities (in thousands):
Three Months Ended
January 1, 2021 January 3, 2020
Cash and cash equivalents, beginning of period $ 129,441 $ 75,519
Net cash provided by operating activities 34,780 37,658
Net cash used in investing activities (24,769) (4,541)
Net cash used in financing activities (11,479) (592)
Foreign currency effect on cash 755 140
Cash and cash equivalents, end of period $
128,728
Cash Flow from Operating Activities Our cash flow from operating activities for the three months endedJanuary 1, 2021 of$34.8 million consisted of a net loss of$9.0 million , plus cash used in operating assets and liabilities of$1.3 million , plus adjustments to reconcile our net loss to cash provided by operating activities of$45.0 million . Adjustments to reconcile our net loss to cash provided by operating activities primarily included depreciation and intangible amortization expense of$18.2 million and share-based compensation expense of$10.1 million , a warrant liability expense of$11.1 million and a loss on minority equity investment of$4.8 million . In addition, cash used in operating assets and liabilities was$1.3 million for the three months endedJanuary 1, 2021 , primarily driven by an increase in accounts receivable of$9.3 million , offset by an increase in accounts payable of$5.4 million and a decrease in inventories of$2.6 million . Our cash flow from operating activities for the three months endedJanuary 3, 2020 of$37.7 million consisted of a net loss of$28.4 million , plus cash provided by operating assets and liabilities of$28.5 million , plus adjustments to reconcile our net loss to cash provided by operating activities of$37.5 million . Adjustments to reconcile our net loss to cash provided by operating activities primarily included depreciation and intangible amortization expense of$20.5 million and share-based compensation expense of$8.2 million , partially offset by a warrant liability expense of$4.1 million and a loss on minority equity investment of$3.7 million . In addition, cash provided by operating assets and liabilities was$28.5 million for the three months endedJanuary 3, 2020 , primarily driven by a decrease in accounts receivable of$18.0 million , due to improved revenue linearity throughout the quarter and timing of collections from customers, a decrease in prepaid expenses and other assets of$5.7 million and an increase in accrued and other liabilities of$5.0 million . Cash Flow from Investing Activities Our cash flow used in investing activities for the three months endedJanuary 1, 2021 consisted primarily of purchases of$82.0 million of short-term investments, capital expenditures of$2.9 million , offset by proceeds of$60.2 million related to the sale and maturity of short-term investments. Our cash flow used in used in investing activities for the three months endedJanuary 3, 2020 consisted primarily of purchases of$77.5 million of short-term investments and capital expenditures of$4.2 million , partially offset by proceeds of$77.2 million related to the sale and maturity of short-term investments. 22
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Cash Flow from Financing Activities During the three months endedJanuary 1, 2021 , our cash used in financing activities of$11.5 million was primarily related to$11.8 million of repurchases of stock associated with employee tax withholdings on vested equity awards and$1.7 million of payments on long-term debt offset by$2.4 million of proceeds from stock option exercises and employee stock purchases. During the three months endedJanuary 3, 2020 , our cash used in financing activities of$0.6 million was primarily related to$1.7 million of payments on notes payable,$0.8 million of payments on financing leases offset by$2.0 million of proceeds from stock option exercises and employee stock purchases. Liquidity As ofJanuary 1, 2021 , we held$128.7 million of cash and cash equivalents, primarily deposited with financial institutions, as well as$226.0 million of liquid short-term investments. The undistributed earnings of certain foreign subsidiaries are considered indefinitely reinvested for the periods presented and we do not intend to repatriate such earnings. We believe the decision to reinvest these earnings will not have a significant impact on our liquidity. As ofJanuary 1, 2021 , cash held by our indefinitely reinvested foreign subsidiaries was$38.2 million , which, along with cash generated from foreign operations, is expected to be used in the support of international growth and working capital requirements as well as the repayment of certain intercompany loans. As ofJanuary 1, 2021 , we had$160.0 million in borrowing capacity under our Revolving Facility, of which we may borrow up to$50.0 million without being subject to certain financial covenants. We plan to use our remaining available cash and cash equivalents, short-term investments, and, as deemed appropriate, our borrowing capacity under our Revolving Facility for general corporate purposes, including working capital, or for the acquisition of or investment in complementary technologies, design teams, products and businesses. We believe that our cash and cash equivalents, short-term investments, cash generated from operations and borrowing availability under the Revolving Facility will be sufficient to meet our working capital requirements for at least the next twelve months. We may need to raise additional capital from time to time through the issuance and sale of equity or debt securities, and there is no assurance that we will be able do so on favorable terms or at all. For additional information related to our Liquidity and Capital Resources, see Note 7 - Debt to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Recent Accounting Pronouncements See Note 1 - Basis of Presentation and Summary of Significant Accounting Policies to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for information about recent accounting pronouncements. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as ofJanuary 1, 2021 .
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