MACOM Technology Solutions Holdings, Inc 10-Q for FY2022 Q2
MACOM Technology Solutions Holdings, Inc. (MTSI)
10-Q
2022-04-28
For: 2022-04-01
View Original
Added on
April 11, 2026
About this 10-Q
MACOM Technology Solutions Holdings, Inc filed this 10-Q on April 28, 2022, covering the quarter ended April 1, 2022 (FY2022 Q2).
Headline figures
Quarter ended April 1, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $165.15M
- up 9.7% from $150.58M a year earlier
- Net income
- $29.56M
- up 99.6% from net income of $14.81M a year earlier
- Diluted EPS
- $0.42
- up 100.0% from $0.21 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended April 1, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-35451
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices and zip code)
(978 ) 656-2500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||
| Emerging growth company | |||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 25, 2022, there were 69,890,536 shares of the registrant’s common stock outstanding.
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
| Page No. | |||||||||||
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 6. | |||||||||||
PART I—FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS | ||||
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
| April 1, 2022 | October 1, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Prepaid and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other investments | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of finance lease obligations | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Finance lease obligations, less current portion | |||||||||||
| Financing obligation, less current portion | |||||||||||
| Long-term debt | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (see Note 12) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Common stock | |||||||||||
| Treasury stock, at cost | ( | ( | |||||||||
| Accumulated other comprehensive income | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
1
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Other (expense) income: | |||||||||||||||||||||||
| Warrant liability expense | ( | ||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Other (expense) income, net | ( | ( | |||||||||||||||||||||
| Total other (expense) income, net | ( | ( | ( | ||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Income per share - Basic | $ | $ | $ | $ | |||||||||||||||||||
| Income per share - Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares used: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See notes to condensed consolidated financial statements.
2
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Unrealized loss on short term investments, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Foreign currency translation loss, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Total comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See notes to condensed consolidated financial statements.
3
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated Other Comprehensive Income | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
Vesting of restricted common stock and units | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Shares repurchased for tax withholdings on restricted stock awards | ( | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of April 1, 2022 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated Other Comprehensive Income | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of October 1, 2021 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted common stock and units | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock pursuant to employee stock purchase plan | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Shares repurchased for tax withholdings on equity awards | ( | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of April 1, 2022 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
4
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated Other Comprehensive Income | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted common stock and units | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Shares repurchased for tax withholdings on equity awards | ( | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Equity component of convertible notes, net | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of April 2, 2021 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated Other Comprehensive Income | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of October 2, 2020 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
Stock option exercises | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted common stock and units | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock pursuant to employee stock purchase plan | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Shares repurchased for tax withholdings on equity awards | ( | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for the cashless exercise of warrants | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Equity component of convertible notes, net | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of April 2, 2021 | $ | ( | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
5
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Six Months Ended | |||||||||||
| April 1, 2022 | April 2, 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and intangibles amortization | |||||||||||
| Share-based compensation | |||||||||||
| Warrant liability expense | |||||||||||
| Deferred financing cost and discount amortization and write-offs | |||||||||||
| Deferred income taxes | |||||||||||
| Gain on equity method investment, net | ( | ( | |||||||||
| Other adjustments, net | |||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Accounts payable | |||||||||||
| Accrued and other liabilities | ( | ||||||||||
| Income taxes | |||||||||||
| Net cash provided by operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Proceeds from sale of equity method investment | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from sales and maturities of short-term investments | |||||||||||
| Purchases of short-term investments | ( | ( | |||||||||
| Proceeds from sale of assets | |||||||||||
| Net cash (used in) provided by investing activities | ( | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Proceeds from convertible notes, net of issuance costs | |||||||||||
| Payments on long-term debt | ( | ||||||||||
| Payments on finance leases | ( | ( | |||||||||
| Proceeds from stock option exercises and employee stock purchases | |||||||||||
| Repurchase of common stock - tax withholdings on equity awards | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Foreign currency effect on cash | ( | ||||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | ( | ( | |||||||||
| CASH AND CASH EQUIVALENTS — Beginning of period | |||||||||||
| CASH AND CASH EQUIVALENTS — End of period | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
6
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information—The accompanying unaudited, condensed consolidated financial statements have been prepared according to the rules and regulations of the United States (the “U.S.”) Securities and Exchange Commission (the “SEC”) and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the condensed consolidated balance sheets, condensed consolidated statements of operations, comprehensive income, stockholders' equity and cash flows of MACOM Technology Solutions Holdings, Inc. (“MACOM”, the “Company”, “us”, “we” or “our”) for the periods presented. We prepare our interim financial information using the same accounting principles we use for our annual audited consolidated financial statements. Certain information and note disclosures normally included in the annual audited consolidated financial statements have been condensed or omitted in accordance with prescribed SEC rules. We believe that the disclosures made in our condensed consolidated financial statements and the accompanying notes are adequate to make the information presented not misleading.
The condensed consolidated balance sheet as of October 1, 2021 is as reported in our audited consolidated financial statements as of that date. Our accounting policies are described in the notes to our October 1, 2021 consolidated financial statements, which were included in our Annual Report on Form 10-K for our fiscal year ended October 1, 2021 filed with the SEC on November 15, 2021 (the “2021 Annual Report on Form 10-K”). We recommend that the financial statements included in this Quarterly Report on Form 10-Q be read in conjunction with the consolidated financial statements and notes included in our 2021 Annual Report on Form 10-K.
Recent Accounting Pronouncements—Our Recent Accounting Pronouncements are described in our 2021 Annual Report on Form 10-K.
Pronouncements Adopted in Fiscal Year 2022
In August 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liability and equity, including convertible instruments and contracts on an entity’s own equity. The standard reduces the number of models used to account for convertible instruments, removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and requires the if-converted method for calculation of diluted earnings per share for all convertible instruments. We early adopted this standard effective October 2, 2021 using the modified retrospective approach transition method. Therefore, the condensed consolidated financial statements for the three and six months ended April 1, 2022 are presented under the new standard, while the comparative periods presented are not adjusted and continue to be reported in accordance with the Company's historical accounting policy. Refer to Note 8 - Debt for the impact of adoption on our 2026 Convertible Notes (as defined below).
7
Pronouncements for Adoption in Subsequent Periods
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to applying the guidance on contract modifications, hedge accounting, and other transactions, to simplify the accounting for transitioning from the London Interbank Offered Rate, and other interbank offered rates expected to be discontinued, to alternative reference rates. The guidance in this update was effective upon its issuance. If elected, the guidance is to be applied prospectively through December 31, 2022. We are currently evaluating the effect the potential adoption of this ASU will have on our consolidated financial statements, including, but not limited to, our Credit Agreement (defined below). For additional information regarding our Credit Agreement, refer to Note 8 - Debt.
2. REVENUE
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by markets and geography, as we believe it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The following tables present our revenue disaggregated by markets and geography (in thousands):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | ||||||||||||||||||||
| Revenue by Market: | |||||||||||||||||||||||
Telecommunications | $ | $ | $ | $ | |||||||||||||||||||
Industrial & Defense | |||||||||||||||||||||||
Data Center | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | ||||||||||||||||||||
| Revenue by Geographic Region: | |||||||||||||||||||||||
United States | $ | $ | $ | $ | |||||||||||||||||||
China | |||||||||||||||||||||||
Asia Pacific, excluding China (1) | |||||||||||||||||||||||
Other Countries (2) | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(1)Asia Pacific primarily represents Taiwan, Japan, Singapore, Thailand, South Korea, Australia and Malaysia.
(2)No country or region represented greater than 10% of our total revenue as of the dates presented, other than the United States, China and Asia Pacific region as presented above.
Contract Balances
We record contract assets or contract liabilities depending on the timing of revenue recognition, billings and cash collections on a contract-by-contract basis. Our contract liabilities primarily relate to deferred revenue, including advanced consideration received from customers for contracts prior to the transfer of control to the customer, and therefore revenue is subsequently recognized upon delivery of products and services.
The following table presents the changes in contract liabilities during the six months ended April 1, 2022 (in thousands, except percentage):
| April 1, 2022 | October 1, 2021 | $ Change | % Change | ||||||||||||||||||||
| Contract liabilities | $ | $ | $ | % | |||||||||||||||||||
As of April 1, 2022 and October 1, 2021, $0.4 million and $0.9 million, respectively, of our contract liabilities, were recorded as other long-term liabilities on our balance sheet with the remainder recorded as accrued liabilities. During the three and six months ended April 1, 2022, we recognized net sales of $0.6 million and $1.0 million, respectively, that were included
8
3. INVESTMENTS
All investments are short-term in nature and are invested in corporate bonds and commercial paper and are classified as available-for-sale. The amortized cost, gross unrealized holding gains or losses and fair value of our available-for-sale investments by major investment type are summarized in the tables below (in thousands):
| April 1, 2022 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Aggregate Fair Value | ||||||||||||||||||||
| Corporate bonds | $ | $ | $ | ( | $ | ||||||||||||||||||
| Commercial paper | ( | ||||||||||||||||||||||
| Total short-term investments | $ | $ | $ | ( | $ | ||||||||||||||||||
| October 1, 2021 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Aggregate Fair Value | ||||||||||||||||||||
| Corporate bonds | $ | $ | $ | ( | $ | ||||||||||||||||||
| Commercial paper | ( | ||||||||||||||||||||||
| Total short-term investments | $ | $ | $ | ( | $ | ||||||||||||||||||
The contractual maturities of available-for-sale investments were as follows (in thousands):
| April 1, 2022 | October 1, 2021 | |||||||
| Less than one year | $ | $ | ||||||
| Over one year | ||||||||
| Total available-for-sale investments | $ | $ | ||||||
We have determined that the gross unrealized losses on available for sale securities as of April 1, 2022 and October 1, 2021 are temporary in nature and/or do not relate to credit loss, and therefore there is no expense for credit losses recorded in our condensed consolidated statements of operations. Unrealized gains and losses on available-for-sale investments are reported as a separate component of stockholders’ equity within accumulated other comprehensive income.
Other Investments — As of April 1, 2022, we held a non-marketable equity investment in Series B preferred stock of a privately held manufacturing corporation with preferred liquidation rights over other equity shares. As the equity securities do not have a readily determinable fair value and do not qualify for the practical expedient under Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, we have elected to account for this investment at cost less any impairment. We evaluate this investment for impairment at each balance sheet date. As of April 1, 2022 and October 1, 2021, the carrying value of this investment was $2.5
As of October 1, 2021, also included in long-term investments was a non-controlling investment of less than 10 % in the outstanding equity of a private company, Ampere Computing Holdings LLC (“Ampere”), that was acquired in conjunction with our divestiture of our compute business during our fiscal year 2018. This investment’s carrying value was updated quarterly based on our proportionate share of the gains or losses, as well as any changes in Ampere's equity, utilizing the equity method. As of October 1, 2021, the carrying value of this investment was $12.8 million.
On December 23, 2021, we sold our investment in Ampere to one of Ampere’s other limited liability company members, pursuant to the terms of a previously negotiated call option included in Ampere’s limited liability company agreement, as amended and restated (the “LLC Agreement”), in exchange for a predetermined fixed price as set forth in the LLC Agreement of approximately $127.8 million in cash consideration. As of December 23, 2021, the carrying value of this investment was approximately $9.5 million. As a result of this transaction, during the three months ended December 31, 2021, we recorded a gain of $118.2 million in Other (expense) income, net in our condensed consolidated statements of operations.
During the three months ended December 31, 2021, we also recorded our proportionate share of the losses on this investment of $3.3 million in Other (expense) income, net in our condensed consolidated statements of operations. We do not
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4. FAIR VALUE
We group our financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 - Quoted prices in active markets for identical assets or liabilities. | ||
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data. | ||
Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by us. | ||
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
We measure certain assets and liabilities at fair value on a recurring basis such as our financial instruments. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the three and six months ended April 1, 2022.
Assets and liabilities measured at fair value on a recurring basis consist of the following (in thousands):
| April 1, 2022 | |||||||||||||||||||||||
| Fair Value | Active Markets for Identical Assets (Level 1) | Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | |||||||||||||||||||
| October 1, 2021 | |||||||||||||||||||||||
| Fair Value | Active Markets for Identical Assets (Level 1) | Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | |||||||||||||||||||
All common stock warrants were exercised during the six months ended April 2, 2021. During the six months ended April 2, 2021, the change in the fair value of the warrant liability, classified within Level 3 of the fair value hierarchy, consist of the following (in thousands):
| October 2, 2020 | Net Realized Losses Included in Earnings | Sales and Settlements | April 2, 2021 | ||||||||||||||||||||||||||||||||
| Common stock warrant liability | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
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5. INVENTORIES
Inventories consist of the following (in thousands):
| April 1, 2022 | October 1, 2021 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Total inventory, net | $ | $ | |||||||||
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
| April 1, 2022 | October 1, 2021 | ||||||||||
| Construction in process | $ | $ | |||||||||
| Machinery and equipment | |||||||||||
| Leasehold improvements | |||||||||||
| Furniture and fixtures | |||||||||||
| Computer equipment and software | |||||||||||
| Finance lease assets | |||||||||||
| Total property and equipment | |||||||||||
| Less accumulated depreciation and amortization | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Depreciation and amortization expense related to property and equipment for the three and six months ended April 1, 2022 was $5.8 million and $11.7 million, respectively. Depreciation and amortization expense related to property and equipment for the three and six months ended April 2, 2021 was $6.0 million and $12.2 million, respectively.
7. INTANGIBLE ASSETS
Amortization expense related to intangible assets is as follows (in thousands):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | ||||||||||||||||||||
| Cost of revenue | $ | $ | $ | $ | |||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Intangible assets consist of the following (in thousands):
| April 1, 2022 | October 1, 2021 | ||||||||||
| Acquired technology | $ | $ | |||||||||
| Customer relationships | |||||||||||
| Trade name (indefinite-lived) | |||||||||||
| Total | |||||||||||
| Less accumulated amortization | ( | ( | |||||||||
| Intangible assets — net | $ | $ | |||||||||
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A summary of the activity in gross intangible assets and goodwill is as follows (in thousands):
| Intangible Assets | |||||||||||||||||||||||||||||
| Total Intangible Assets | Acquired Technology | Customer Relationships | Trade Name | Goodwill | |||||||||||||||||||||||||
| Balance as of October 1, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Currency translation adjustment | ( | ||||||||||||||||||||||||||||
| Balance as of April 1, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
As of April 1, 2022, our estimated amortization of our intangible assets in future fiscal years was as follows (in thousands):
| 2022 Remaining | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||||
| Amortization expense | $ | $ | |||||||||||||||||||||
Accumulated amortization for acquired technology and customer relationships were $171.6 million and $189.7 million, respectively, as of April 1, 2022, and $167.3 million and $176.7 million, respectively, as of October 1, 2021.
8. DEBT
The following represents the outstanding balances and effective interest rates of our borrowings as of April 1, 2022 and October 1, 2021, (in thousands, except percentages):
| April 1, 2022 | October 1, 2021 | ||||||||||||||||
| Principal Balance | Effective Interest Rate | Principal Balance | Effective Interest Rate | ||||||||||||||
LIBOR plus | $ | % | $ | % | |||||||||||||
| % | % | ||||||||||||||||
| Total principal amount outstanding | |||||||||||||||||
| Less: Unamortized discount on term loans and deferred financing costs | ( | ( | |||||||||||||||
| Less: Unamortized discount on convertible notes | ( | ||||||||||||||||
| Total long-term debt | $ | $ | |||||||||||||||
Term Loans
As of April 1, 2022, we are party to a credit agreement, dated as of May 8, 2014, with a syndicate of lenders and Goldman Sachs Bank USA, as administrative agent (as amended on February 13, 2015, August 31, 2016, March 10, 2017, May 19, 2017, May 2, 2018 and May 9, 2018, the “Credit Agreement”).
As of April 1, 2022, the Credit Agreement consisted of term loans with an initial aggregate principal amount of $700.0 million (the “Term Loans”) that will mature in May 2024 and bear interest at: (i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of 2.25 %; and (ii) for base rate loans, a rate per annum equal to the greater of (a) the prime rate quoted in the print edition of the Wall Street Journal, Money Rates Section, (b) the federal funds rate plus one-half of 1.00% and (c) the LIBOR rate applicable to a one-month interest period plus 1.00 % (but, in each case, not less than 1.00 %), plus an applicable margin of 1.25 %.
During the fiscal quarter ended April 2, 2021, we repaid $494.3 million in principal under the Term Loans using $394.3 million of the net proceeds from our 2026 Convertible Notes offering, described below, as well as existing cash and short-term investments. In connection with this prepayment, we expensed unamortized deferred financing costs and recognized a loss on extinguishment of debt of $3.8
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As of April 1, 2022, there are no minimum principal repayments on the Term Loans until fiscal year 2024 when the remaining principal balance of $120.8 million becomes due. The fair value of the Term Loans was estimated to be approximately $119.9 million and $120.2 million, as of April 1, 2022 and October 1, 2021, respectively, and was determined using Level 2 inputs, including a quoted price from a financial institution.
As of April 1, 2022, approximately $0.7 million of deferred financing costs remain unamortized related to the Term Loans and is recorded as a direct reduction of the recognized debt liabilities in our accompanying condensed consolidated balance sheet.
The Term Loans are secured by a first priority lien on substantially all of our assets and provide that we must comply with certain financial and non-financial covenants.
2026 Convertible Notes
On March 25, 2021, we issued 0.25 % convertible senior notes due in fiscal year 2026, pursuant to an indenture dated as of such date (the “Indenture”), between the Company and U.S. Bank National Association, as trustee, with an aggregate principal amount of $400.0 million (the “Initial Notes”), and on April 6, 2021, we issued an additional $50.0 million aggregate principal amount (the “Additional Notes”) (together, the “2026 Convertible Notes”). The aggregate principal balance of the 2026 Convertible Notes is $450.0 million. The 2026 Convertible Notes will mature on March 15, 2026, unless earlier converted, redeemed or repurchased.
The Additional Notes were issued and sold to the initial purchaser of the Initial Notes, pursuant to the option to purchase the Additional Notes granted by the Company to the initial purchaser and have the same terms as the Initial Notes.
Holders of the 2026 Convertible Notes may convert their notes at their option at any time prior to the close of business on the business day immediately preceding December 15, 2025 in multiples of $1,000 principal amount, only under the following circumstances: (i) during any fiscal quarter commencing after the fiscal quarter ending on July 2, 2021 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price for the notes on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “Measurement Period”) in which the “trading price” (as defined in the Indenture) per $1,000 principal amount of the notes for each trading day of the Measurement Period was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate for the notes on each such trading day; (iii) if we call such notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the applicable redemption date; or (iv) upon the occurrence of specified corporate events described in the Indenture. On or after December 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes in multiples of $1,000 principal amount, regardless of the foregoing circumstances.
The initial conversion rate for the 2026 Convertible Notes is 12.1767 shares of common stock per $1,000 principal amount of the notes, equivalent to an initial conversion price of approximately $82.12 per share of common stock. The conversion rate will be subject to adjustment upon the occurrence of certain specified events in the Indenture.
In November 2021, we made an irrevocable election to pay cash for the aggregate principal amount of notes to be converted. Upon conversion of the 2026 Convertible Notes, we are required to pay cash up to the aggregate principal amount of the notes to be converted and pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the notes being converted (subject to, and in accordance with, the settlement provisions of the Indenture). We may not redeem the notes prior to March 20, 2024. We may redeem for cash all or any portion of the notes, at our option, on or after March 20, 2024 if the last reported sale price per share of our common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption, at a redemption price equal to 100 % of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, to, but not including, the redemption date.
The Indenture does not contain any financial or operating covenants or restrictions on the payments of dividends, the making of investments, the incurrence of indebtedness or the purchase or prepayment of securities by us or any of our subsidiaries.
Prior to the adoption of ASU 2020-06 on October 2, 2021, the proceeds from the issuance of the 2026 Convertible Notes were allocated between the conversion feature recorded as equity and the liability for the notes themselves. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was
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determined by deducting the fair value of the liability component from the par value of the 2026 Convertible Notes. The difference of $80.7 million between the principal amount of the 2026 Convertible Notes and the liability component (the “Debt Discount”) was amortized to interest expense using the effective interest method over the term of the 2026 Convertible Notes until the adoption of ASU 2020-06. The equity component of the 2026 Convertible Notes was included in additional paid-in capital in the consolidated balance sheet and was not to be remeasured as long as it continued to meet the conditions for equity classification.
Prior to the adoption of ASU 2020-06, to account for the transaction costs related to the 2026 Convertible Notes, we allocated the total amount incurred of approximately $5.7 million to the liability and equity components of the 2026 Convertible Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were approximately $4.7 million, were recorded as additional Debt Discount and were amortized to interest expense over the contractual terms of the 2026 Convertible Notes. Issuance costs attributable to the equity component were approximately $1.0 million and were recorded as a reduction of additional paid in capital in stockholders’ equity.
In connection with the adoption of ASU 2020-06, we reclassified $72.2 million, consisting of $73.1 million of principal and issuance costs of $0.9 million, previously allocated to the conversion feature, from additional paid-in capital to long-term debt on our condensed consolidated balance sheet as of October 2, 2021. The reclassification was recorded to combine the two legacy units of account into a single instrument classified as a liability. We also recognized a cumulative effect adjustment of $7.5 million to accumulated deficit on our condensed consolidated balance sheet as of October 2, 2021, that was primarily driven by the derecognition of interest expense related to the accretion of the Debt Discount as required under the legacy accounting guidance. Under ASU 2020-06, we will no longer incur non-cash interest expense related to the accretion of the debt discount associated with the embedded conversion option.
For the three and six months ended April 2, 2021, accretion of the Debt Discount included in interest expense was $0.3 million and total interest expense for the 2026 Convertible Notes was $0.3 million. For the three and six months ended April 1, 2022, total interest expense for the 2026 Convertible Notes was $0.3 million and $0.6 million, respectively.
The fair value of our 2026 Convertible Notes, including the conversion feature, was $454.5 million and $479.4 million, as of April 1, 2022 and October 1, 2021, respectively, and was determined based on quoted prices in markets that are not active, which is considered a Level 2 valuation input.
There are no future minimum principal payments under the notes as of April 1, 2022; the full amount of $450.0 million is due in fiscal year 2026.
9. F INANCING OBLIGATION
10. STOCKHOLDERS' EQUITY
We have authorized 10 million shares of $0.001 par value preferred stock and 300 million shares of $0.001 par value common stock as of April 1, 2022.
Common Stock Warrants—In March 2012, we issued warrants to purchase 1,281,358 shares of common stock for $14.05 per share. During the fiscal quarter ended January 1, 2021, the holders of the warrants made cashless exercises of 1,281,358 shares at an exercise price of $14.05 per share, resulting in the issuance of 857,631 shares of common stock.
During the six months ended April 2, 2021, we recorded the changes in the estimated fair value of the warrants in the accompanying statements of operations. See Note 4 - Fair Value for additional information. See Note 11 - Earnings Per Share for impact of the common stock warrants on net income per share.
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11. EARNINGS PER SHARE
The following table sets forth the computation for basic and diluted net income per share of common stock (in thousands, except per share data):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common shares outstanding-basic | |||||||||||||||||||||||
| Dilutive effect of stock options, restricted stock and restricted stock units | |||||||||||||||||||||||
| Weighted average common shares outstanding-diluted | |||||||||||||||||||||||
| Net income to common stockholders per share-Basic: | $ | $ | $ | $ | |||||||||||||||||||
| Net income to common stockholders per share-Diluted: | $ | $ | $ | $ | |||||||||||||||||||
12. COMMITMENTS AND CONTINGENCIES
13. SHARE-BASED COMPENSATION
Stock Plans
As of April 1, 2022, we had 5.4 million shares available for issuance under our 2021 Omnibus Incentive Plan (the “2021 Plan”), which replaced our 2012 Omnibus Incentive Plan (as amended and restated) (the “2012 Plan”), and 1.4 million shares available for issuance under our 2021 Employee Stock Purchase Plan (the “Employee Stock Purchase Plan”), which replaced our 2012 Employee Stock Purchase Plan. We have outstanding awards under the 2021 Plan and the 2012 Plan. Following the adoption of the 2021 Plan, no additional awards have been or will be made under the 2012 Plan. Under the 2021 Plan, we have the ability to issue incentive stock options (“ISOs”), non-statutory stock options (“NSOs”), stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), unrestricted stock awards, stock units (including restricted stock units (“RSUs”) and performance-based restricted stock units (“PRSUs”)), performance awards, cash awards, and other share-based awards to employees, directors, consultants and advisors. The ISOs and NSOs must be granted at an exercise price, and the SARs must be granted at a base value, per share of not less than 100% of the closing price of a share of our common stock on the date of grant (or, if no closing price is reported on that date, the closing price on the immediately preceding date on which a closing price was reported) (110% in the case of certain ISOs). Options granted under the 2012 Plan primarily vested based on certain market-based and performance-based criteria and generally have a term of four years to seven years . Certain of the share-based awards granted and outstanding as of April 1, 2022 are subject to accelerated vesting upon a change in control of the Company.
Incentive Stock Units
Outside of the equity plans described above, we also grant incentive stock units (“ISUs”) to certain of our international employees which typically vest over or four years and for which the fair value is determined by our underlying stock price, which are classified as liabilities and settled in cash upon vesting.
As of April 1, 2022 and October 1, 2021, the fair value of outstanding awards was $5.3 million and $8.9 million, respectively, and the associated accrued compensation liability was $3.1 million and $6.2 million, respectively. During the three and six months ended April 1, 2022, we recorded a benefit for ISU awards of $0.9 million and expense of $0.6 million,
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respectively. During the three and six months ended April 2, 2021, we recorded expense of $1.2 million and $4.2 million, respectively. These expenses are not included in the share-based compensation expense totals below.
Share-Based Compensation
The following table shows a summary of share-based compensation expense included in the condensed consolidated statements of operations (in thousands):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | ||||||||||||||||||||
| Cost of revenue | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total share-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
As of April 1, 2022, the total unrecognized compensation costs related to RSAs, RSUs and PRSUs was $62.4 million, which we expect to recognize over a weighted-average period of 2.2 years. As of April 1, 2022, total unrecognized compensation cost related to our Employee Stock Purchase Plan was $0.2 million.
Restricted Stock, Restricted Stock Units and Performance-Based Restricted Stock Unit Awards
A summary of stock award activity for the six months ended April 1, 2022 is as follows:
| Number of shares (in thousands) | Weighted- Average Grant Date Fair Value | ||||||||||
| Balance as of October 1, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Vested and released | ( | ||||||||||
| Forfeited, canceled or expired | ( | ||||||||||
| Balance as of April 1, 2022 | $ | ||||||||||
Stock awards that vested during the six months ended April 1, 2022 and April 2, 2021 had combined fair values of $89.3 million and $60.8 million, respectively, as of the vesting date. RSUs granted generally vest over a period of or four years .
We granted 161,349 market-based PRSUs during the six months ended April 1, 2022, at a weighted average grant date fair value of $89.82 per share, or $14.5 million. Recipients may earn between 0% and 200% of the target number of shares granted, based on our achievement of total shareholder return in comparison to a selected group of peer companies over a three-year performance period. The fair value of these awards was estimated using a Monte Carlo simulation and share-based compensation expense is recognized ratably over the service period, based on the grant date fair value of the awards subject to the market condition. The significant assumptions used in the Monte Carlo simulation to calculate the fair value of these market-based PRSUs are as follows:
| Six Months Ended | |||||
| April 1, 2022 | |||||
| Grant date stock price | $ | ||||
| Average stock price at the start of the performance period | $ | ||||
| Risk free interest rate | % | ||||
| Years to maturity | |||||
| Expected volatility rate | % | ||||
| Expected dividend yield | |||||
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Stock Options
A summary of stock option activity for the six months ended April 1, 2022 is as follows (in thousands, except per share amounts and contractual term):
| Number of Shares | Weighted-Average Exercise Price per Share | Weighted-Average Remaining Contractual Term (in Years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Options outstanding as of October 1, 2021 | $ | ||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Forfeited, canceled or expired | |||||||||||||||||||||||
| Options outstanding as of April 1, 2022 | $ | $ | |||||||||||||||||||||
| Options vested and exercisable as of April 1, 2022 | |||||||||||||||||||||||
Aggregate intrinsic value represents the difference between our closing stock price on April 1, 2022 and the exercise price of outstanding, in-the-money options. The total intrinsic value of options exercised was $11.0 million for the six months ended April 1, 2022 and was $1.8 million and $2.1 million for the three and six months ended April 2, 2021, respectively. There were no options exercised during the three months ended April 1, 2022.
14. INCOME TAXES
We are subject to income tax in the U.S. as well as other tax jurisdictions in which we conduct business. Earnings from non-U.S. activities are subject to local country income tax and may also be subject to current U.S. income tax. For interim periods, we record a tax provision or benefit based upon the estimated effective tax rate expected for the full fiscal year, adjusted for material discrete taxation matters arising during the interim periods. Our quarterly tax provision or benefit, and its quarterly estimate of the annual effective tax rate, are subject to significant variation due to several factors. These factors include items such as: variability in accurately predicting pre-tax income/loss, the mix of jurisdictions in which we operate, intercompany transactions, changes in how we do business, tax law developments, and relative changes in permanent tax benefits or expenses.
The provision for income taxes and effective income tax rate are as follows (in thousands, except percentages):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | ||||||||||||||||||||
| Income tax expense | $ | $ | $ | $ | |||||||||||||||||||
| Effective income tax rate | % | % | % | % | |||||||||||||||||||
The difference between the U.S. federal statutory income tax rate of 21 % and our effective income tax rates for the three and six months ended April 1, 2022 and April 2, 2021 was primarily driven by the continuation of a full valuation allowance against any expense or benefit associated with income or losses in the U.S. and income taxed in foreign jurisdictions generally at lower tax rates and where a valuation allowance does not apply. The gain on the sale of our equity interest in Ampere during the six months ended April 1, 2022 has been offset by our net operating loss carryforwards.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making this determination, we consider available positive and negative evidence. We look at factors that may impact the valuation of our deferred tax asset including results of recent operations, future reversals of existing taxable temporary differences, projected future taxable income, and tax-planning strategies. We have determined that there was not sufficient objectively verifiable positive evidence to offset our significant negative objective evidence, therefore, we concluded that a full valuation allowance is appropriate for our U.S. deferred tax assets. Our negative objective evidence consists primarily of adjusted cumulative losses in the U.S. over the three-year period ended April 1, 2022.
Our deferred income tax asset balance as of April 1, 2022 and October 1, 2021 is primarily attributable to an initial $39.8
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15. SUPPLEMENTAL CASH FLOW INFORMATION
The following is a summary of supplemental cash flow information for the periods presented (in thousands):
| Six Months Ended | |||||||||||
| April 1, 2022 | April 2, 2021 | ||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Non-cash activities: | |||||||||||
| Operating lease right-of-use assets obtained in exchange for new lease liabilities | $ | $ | |||||||||
| Additions to property and equipment, net included in liabilities | $ | $ | |||||||||
| Issuance of common stock for the cashless exercise of warrants | $ | $ | |||||||||
16. GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
We have one reportable operating segment that designs, develops, manufactures and markets semiconductors and modules. The determination of the number of reportable operating segments is based on the chief operating decision maker’s (“CODM”) use of financial information provided for the purposes of assessing performance and making operating decisions. The Company's CODM is its President and Chief Executive Officer. In evaluating financial performance and making operating decisions, the CODM primarily uses consolidated metrics. The Company assesses its determination of operating segments at least annually. We continue to evaluate our internal reporting structure and the potential impact of any changes on our segment reporting.
For information about our revenue in different geographic regions, based upon customer locations, see Note 2 - Revenue. Information about net property and equipment in different geographic regions is presented below (in thousands):
| April 1, 2022 | October 1, 2021 | |||||||||||||
| United States | $ | $ | ||||||||||||
Europe (1) | ||||||||||||||
Other Countries (2) | ||||||||||||||
| Total | $ | $ | ||||||||||||
(1)Europe primarily represents Finland, France, Germany, Ireland and Italy.
(2)Other than the United States and Europe, no country or region represented greater than 10% of the total net property and equipment as of the dates presented.
The following is a summary of customer concentrations as a percentage of revenue and accounts receivable as of and for the periods presented:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| Revenue | April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | |||||||||||||||||||
| Customer A | % | % | |||||||||||||||||||||
| Accounts Receivable | April 1, 2022 | October 1, 2021 | |||||||||
| Customer A | % | ||||||||||
Customer A did not represent more than 10% of our revenue in the three and six months ended April 1, 2022. No other customer represented more than 10% of revenue or accounts receivable in the periods presented in the accompanying condensed consolidated financial statements. For the three and six months ended April 1, 2022, our top ten customers represented 48 % and 45 %, respectively, of total revenue, and for the three and six months ended April 2, 2021, our top ten customers represented 52 % and 53 %, respectively, of total revenue.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 ended October 1, 2021 filed with the United States Securities and Exchange Commission (“SEC”) on November 15, 2021 (the “2021 Annual Report on Form 10-K”).
In this document, the words “Company,” “we,” “our,” “us,” and similar terms refer only to MACOM Technology Solutions Holdings, Inc. and its consolidated subsidiaries, and not any other person or entity.
“MACOM,” “MACOM Technology Solutions,” and related logos are trademarks of MACOM 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 regarding our business outlook, strategic plans and priorities, expectations, 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 and short-term investments, our ability to meet working capital requirements, estimates and objectives for future operations, our future results of operations and our financial position and other matters that do not relate strictly to historical facts. Forward-looking statements generally may be identified by terms such as “anticipates,” “believes,” “could,” “continue,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “targets,” “will,” “would” or similar expressions or variations or the negatives of those terms. 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 2021 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 industries. Headquartered in Lowell, Massachusetts, with operational facilities throughout North America, Europe and Asia, 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 expertise in analog and mixed signal circuit design, compound semiconductor fabrication (including gallium arsenide (“GaAs”), indium phosphide (“InP”) and specialized silicon), advanced packaging 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, data center applications, radar, medical systems and test and measurement applications. Our primary end 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 (“DCI”) applications, at 100G, 200G, 400G, 800G 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 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
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other disruptions, have impacted our operations, the operations of our customers and those of our respective vendors and suppliers, such impacts did not, through the six months ended April 1, 2022, have a material impact on our consolidated operating results.
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 supply chain, 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, any resurgence of COVID-19 cases, including as a result of variant strains of the underlying virus, actions taken to contain the virus or treat its impact, the availability and efficacy of vaccines against COVID-19, 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 2021 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-based products that we sell to customers through our direct sales organization, our network of independent sales representatives and our distributors.
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.
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 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 with U.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. 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 the
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SEC. 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.
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 2021 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 | Six Months Ended | ||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | ||||||||||||||||||||
| Revenue | $ | 165,147 | $ | 150,583 | $ | 324,767 | $ | 299,087 | |||||||||||||||
Cost of revenue (1) | 66,158 | 66,470 | 131,636 | 134,713 | |||||||||||||||||||
| Gross profit | 98,989 | 84,113 | 193,131 | 164,374 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
Research and development (1) | 35,455 | 34,619 | 70,925 | 71,555 | |||||||||||||||||||
Selling, general and administrative (1) | 30,963 | 30,522 | 62,566 | 61,774 | |||||||||||||||||||
| Total operating expenses | 66,418 | 65,141 | 133,491 | 133,329 | |||||||||||||||||||
| Income from operations | 32,571 | 18,972 | 59,640 | 31,045 | |||||||||||||||||||
| Other (expense) income: | |||||||||||||||||||||||
Warrant liability expense (2) | — | — | — | (11,130) | |||||||||||||||||||
| Interest expense | (1,389) | (4,851) | (3,082) | (9,585) | |||||||||||||||||||
Other (expense) income, net (3) | (55) | 2,879 | 114,853 | (1,624) | |||||||||||||||||||
| Total other (expense) income, net | (1,444) | (1,972) | 111,771 | (22,339) | |||||||||||||||||||
| Income before income taxes | 31,127 | 17,000 | 171,411 | 8,706 | |||||||||||||||||||
| Income tax expense | 1,569 | 2,193 | 3,026 | 2,867 | |||||||||||||||||||
| Net income | $ | 29,558 | $ | 14,807 | $ | 168,385 | $ | 5,839 | |||||||||||||||
(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 | Six Months Ended | ||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | ||||||||||||||||||||
| (a) Intangible amortization expense: | |||||||||||||||||||||||
| Cost of revenue | $ | 1,778 | $ | 3,806 | $ | 4,283 | $ | 7,683 | |||||||||||||||
| Selling, general and administrative | 6,276 | 7,601 | 13,058 | 15,717 | |||||||||||||||||||
| (b) Share-based compensation expense: | |||||||||||||||||||||||
| Cost of revenue | $ | 1,073 | $ | 833 | $ | 2,106 | $ | 1,705 | |||||||||||||||
| Research and development | 3,511 | 3,431 | 7,110 | 6,985 | |||||||||||||||||||
| Selling, general and administrative | 5,383 | 4,305 | 10,700 | 10,010 | |||||||||||||||||||
(2) Represents changes in the fair value of common stock warrants recorded as liabilities and adjusted each reporting period to fair value. See Note 10 - Stockholders’ Equity to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
(3) The six months ended April 1, 2022 includes gain on sale of our equity method investment of $118.2 million. Includes net losses of $3.3 million for the six months ended April 1, 2022 and income of $6.5 million and $1.7 million for the three and six months ended
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April 2, 2021, 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 three and six months ended April 2, 2021 includes a loss on extinguishment of debt of $3.8 million, see Note 8 - Debt 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 | Six Months Ended | ||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | ||||||||||||||||||||
| Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
| Cost of revenue | 40.1 | 44.1 | 40.5 | 45.0 | |||||||||||||||||||
| Gross profit | 59.9 | 55.9 | 59.5 | 55.0 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 21.5 | 23.0 | 21.8 | 23.9 | |||||||||||||||||||
| Selling, general and administrative | 18.7 | 20.3 | 19.3 | 20.7 | |||||||||||||||||||
| Total operating expenses | 40.2 | 43.3 | 41.1 | 44.6 | |||||||||||||||||||
| Income from operations | 19.7 | 12.6 | 18.4 | 10.4 | |||||||||||||||||||
| Other (expense) income: | |||||||||||||||||||||||
| Warrant liability expense | — | — | — | (3.7) | |||||||||||||||||||
| Interest expense | (0.8) | (3.2) | (0.9) | (3.2) | |||||||||||||||||||
| Other (expense) income, net | 0.0 | 1.9 | 35.4 | (0.5) | |||||||||||||||||||
| Total other (expense) income, net | (0.9) | (1.3) | 34.4 | (7.5) | |||||||||||||||||||
| Income before income taxes | 18.8 | 11.3 | 52.8 | 2.9 | |||||||||||||||||||
| Income tax expense | 1.0 | 1.5 | 0.9 | 1.0 | |||||||||||||||||||
| Net income | 17.9 | % | 9.8 | % | 51.8 | % | 2.0 | % | |||||||||||||||
Comparison of the Three and Six Months Ended April 1, 2022 to the Three and Six Months Ended April 2, 2021
Revenue. Our revenue increased by $14.6 million, or 9.7%, to $165.1 million for the three months ended April 1, 2022, from $150.6 million for the three months ended April 2, 2021, and our revenue increased by $25.7 million, or 8.6%, to $324.8 million for the six months ended April 1, 2022, from $299.1 million for the six months ended April 2, 2021. The increase in revenue in the three and six months ended April 1, 2022 is described by end market in the following paragraphs.
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 | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | % Change | April 1, 2022 | April 2, 2021 | % Change | ||||||||||||||||||||||||||||||||||||||||||
| Telecom | $ | 62,927 | $ | 42,273 | 48.9 | % | $ | 118,749 | $ | 93,805 | 26.6 | % | |||||||||||||||||||||||||||||||||||
| Industrial & Defense | 67,139 | 72,090 | (6.9) | % | 140,285 | 133,708 | 4.9 | % | |||||||||||||||||||||||||||||||||||||||
| Data Center | 35,081 | 36,220 | (3.1) | % | 65,733 | 71,574 | (8.2) | % | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 165,147 | $ | 150,583 | 9.7 | % | $ | 324,767 | $ | 299,087 | 8.6 | % | |||||||||||||||||||||||||||||||||||
| Telecom | 38.1 | % | 28.1 | % | 36.6 | % | 31.4 | % | |||||||||||||||||||||||||||||||||||||||
| Industrial & Defense | 40.7 | % | 47.9 | % | 43.2 | % | 44.7 | % | |||||||||||||||||||||||||||||||||||||||
| Data Center | 21.2 | % | 24.0 | % | 20.2 | % | 23.9 | % | |||||||||||||||||||||||||||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||||||||||||||||
In the three months ended April 1, 2022, our Telecom market revenue increased by $20.7 million, or 48.9%, compared to the three months ended April 2, 2021. In the six months ended April 1, 2022, our Telecom market revenue increased by $24.9 million, or 26.6%, compared to the six months ended April 2, 2021. The increase for the three and six months ended April 1,
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2022 was primarily driven by an increase in RF and microwave products for cable and video infrastructure, products targeted for 5G applications and carrier-based optical semiconductor products.
In the three months ended April 1, 2022, our I&D market revenue decreased by $5.0 million, or 6.9%, compared to the three months ended April 2, 2021. In the six months ended April 1, 2022, our I&D market revenue increased by $6.6 million, or 4.9%, compared to the six months ended April 2, 2021. The decrease in the three months ended April 1, 2022 was primarily related to timing of shipments and a decrease in sales of legacy products. The increase in the six months ended April 1, 2022 was primarily related to new program wins and expansion of our product lines, partially offset by lower sales of legacy products.
In the three months ended April 1, 2022, our Data Center market revenue decreased by $1.1 million, or 3.1%, compared to the three months ended April 2, 2021. In the six months ended April 1, 2022, our Data Center market revenue decreased by $5.8 million, or 8.2%, compared to the six months ended April 2, 2021. The decrease in the six months ended April 1, 2022 was primarily due to a decrease in sales of our high-performance analog and legacy Data Center products due to supply constraints.
Gross profit. Gross margin was 59.9% and 55.9% for the three months ended April 1, 2022 and April 2, 2021, respectively, and 59.5% and 55.0% for the six months ended April 1, 2022 and April 2, 2021, respectively. Gross profit was $99.0 million and $84.1 million for the three months ended April 1, 2022 and April 2, 2021, respectively, and $193.1 million and $164.4 million for the six months ended April 1, 2022 and April 2, 2021, respectively. Gross profit increased for the three and six months ended April 1, 2022 as compared to the three and six months ended April 2, 2021 primarily as a result of higher sales, favorable revenue mix, production efficiencies, as well as decreases in intangible amortization, depreciation and warranty expense, partially offset by increases in production supplies and employee-related costs.
Research and development. Research and development expense increased by $0.8 million, or 2.4%, to $35.5 million, or 21.5% of our revenue, for the three months ended April 1, 2022, compared to $34.6 million, or 23.0% of our revenue, for the three months ended April 2, 2021. Research and development expense decreased by $0.6 million, or 0.9%, to $70.9 million, or 21.8% of our revenue, for six months ended April 1, 2022, compared to $71.6 million, or 23.9% of our revenue, for the six months ended April 2, 2021. Research and development expense increased in the three months ended April 1, 2022 primarily as a result of an increase in employee-related and design software costs, partially offset by lower development supplies and foundry costs. Research and development expense decreased in six months ended April 1, 2022 primarily as a result of lower lease, design supplies and foundry costs, partially offset by increases in employee-related costs.
Selling, general and administrative. Selling, general and administrative expense increased by $0.4 million, or 1.4%, to $31.0 million, or 18.7% of our revenue, for the three months ended April 1, 2022, compared to $30.5 million, or 20.3% of our revenue, for the three months ended April 2, 2021. Selling, general and administrative expense increased by $0.8 million, or 1.3%, to $62.6 million, or 19.3% of our revenue, for the six months ended April 1, 2022, compared to $61.8 million, or 20.7% of our revenue, for the six months ended April 2, 2021. Selling, general and administrative expense increased in the three and six months ended April 1, 2022 primarily due to an increase in employee-related costs, share-based compensation expense and variable selling costs, partially offset by a decrease in intangible amortization.
Warrant liability expense. There was no warrant liability expense for the three and six months ended April 1, 2022 or the three months ended April 2, 2021, compared to an expense of $11.1 million for the six months ended April 2, 2021. The expense for the six months ended April 2, 2021 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. For additional information refer to Note 10 - Stockholders' Equity to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Interest expense, net. In the three months ended April 1, 2022, interest expense, net was $1.4 million, or 0.8% of our revenue, compared to $4.9 million, or 3.2% of our revenue, for the three months ended April 2, 2021. In the six months ended April 1, 2022, interest expense, net was $3.1 million, or 0.9% of our revenue, compared to $9.6 million, or 3.2% of our revenue, for the six months ended April 2, 2021. The decrease for the three and six months ended April 1, 2022 is primarily due to the issuance of our 2026 Convertible Notes with a lower interest rate as compared to our Term Loans, as well as the reduction in our Term Loan balance. For additional information refer to Note 8 - Debt to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Other (expense) income, net. In the three months ended April 1, 2022, other expense, net was $0.1 million, or 0.03% of our revenue, compared to other income, net of $2.9 million, or 1.9% of our revenue, for the three months ended April 2, 2021. In the six months ended April 1, 2022, other income, net was $114.9 million, or 35.4% of our revenue, compared to other expense, net of $1.6 million, or 0.5% of our revenue, for the six months ended April 2, 2021. The decrease in other income the three months ended April 1, 2022 is due to a decrease in net gains from our equity method investment that was sold during the three months ended December 31, 2021. The increase in the six months ended April 1, 2022 is primarily due to the gain on sale of
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our equity method investment of $118.2 million. See Note 3 - Investments to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information.
Provision for income taxes. Our income tax expense and effective income tax rates for the periods indicated were (in thousands, except percentages):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| April 1, 2022 | April 2, 2021 | April 1, 2022 | April 2, 2021 | |||||||||||||||||||||||
| Income tax expense | 1,569 | 2,193 | 3,026 | 2,867 | ||||||||||||||||||||||
| Effective income tax rate | 5.0 | % | 12.9 | % | 1.8 | % | 32.9 | % | ||||||||||||||||||
Our estimated annual effective tax rate for the year ending September 30, 2022 is expected to be approximately 2%, 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 and six months ended April 1, 2022 and the three and six months ended April 2, 2021 was primarily driven by the continuation of a full valuation allowance against any expense associated with income in the U.S. 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. The gain on the sale of our equity interest in Ampere during the three and six months ended April 1, 2022 has been offset by our net operating loss carryforwards. As of April 1, 2022, we maintain a full valuation allowance against our U.S. deferred tax assets. We will continue to monitor all evidence in the future as we assess the impact of the full valuation allowance for U.S. deferred tax assets. 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):
| Six Months Ended | ||||||||||||||
| April 1, 2022 | April 2, 2021 | |||||||||||||
| Cash and cash equivalents, beginning of period | $ | 156,537 | $ | 129,441 | ||||||||||
| Net cash provided by operating activities | 76,597 | 62,721 | ||||||||||||
| Net cash (used in) provided by investing activities | (75,212) | 34,012 | ||||||||||||
| Net cash used in financing activities | (30,123) | (121,098) | ||||||||||||
| Foreign currency effect on cash | (224) | 464 | ||||||||||||
| Cash and cash equivalents, end of period | $ | 127,575 | $ | 105,540 | ||||||||||
Cash Flow from Operating Activities
Our cash flow from operating activities for the six months ended April 1, 2022 of $76.6 million consisted of a net income of $168.4 million, less adjustments of $63.5 million, to reconcile our net income to cash provided by operating activities, and cash used in operating assets and liabilities of $28.3 million. Adjustments to reconcile our net income to cash provided by operating activities primarily included a net gain of $114.9 million related to the sale of our equity method investment offset by equity method investment losses, depreciation and intangible amortization expense of $29.1 million and share-based compensation expense of $19.9 million. In addition, cash used in operating assets and liabilities was $28.3 million for the six months ended April 1, 2022, primarily driven by an increase in accounts receivable of $16.0 million, an increase in inventories of $10.7 million and a decrease of $4.9 million in accrued and other liabilities.
Our cash flow from operating activities for the six months ended April 2, 2021 of $62.7 million consisted of a net income of $5.8 million, plus adjustments to reconcile our net income to cash provided by operating activities of $70.6 million, plus cash used in operating assets and liabilities of $13.7 million. Adjustments to reconcile our net income to cash provided by operating activities primarily included depreciation and intangible amortization expense of $35.6 million and share-based compensation expense of $18.7 million, warrant liability expense of $11.1 million deferred financing cost amortization and write-offs of $5.0 million. In addition, cash used in operating assets and liabilities was $13.7 million for the six months ended April 2, 2021, primarily driven by an increase in accounts receivable of $22.4 million and an increase in prepaid and other current assets of $4.0 million, offset by a decrease in inventories of $7.1 million and an increase in accounts payable of $3.8 million.
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Cash Flow from Investing Activities
Our cash flow used in investing activities for the six months ended April 1, 2022 of $75.2 million consisted primarily of purchases of $282.6 million of short-term investments and capital expenditures of $12.2 million, offset by proceeds from the sale of our equity method investment of $127.8 million and proceeds of $91.8 million for the sale and maturity of short-term investments. For additional information on the sale of our equity method investment, see Note 3 - Investments to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Our cash flow provided by investing activities for the six months ended April 2, 2021 of $34.0 million consisted primarily of proceeds of $179.4 million related to the sale and maturity of short-term investments, offset by purchases of $138.1 million of short-term investments and capital expenditures of $7.3 million.
Cash Flow from Financing Activities
During the six months ended April 1, 2022, our cash used in financing activities of $30.1 million was primarily related to $34.8 million of repurchases of common stock associated with employee tax withholdings on vested equity awards, partially offset by $5.1 million of proceeds from stock option exercises and employee stock purchases.
During the six months ended April 2, 2021, our cash used in financing activities of $121.1 million was primarily related to proceeds from the 2026 Convertible Notes, net of issuance costs of $394.9 million, offset by $496.0 million of payments on the Term Loans and $22.3 million of repurchases of stock associated with employee tax withholdings on vested equity awards.
Liquidity
As of April 1, 2022, we held $127.6 million of cash and cash equivalents, primarily deposited with financial institutions, as well as $375.4 million of liquid short-term investments. During the three months ended December 31, 2021, our revolving credit facility, which had $160.0 million in borrowing capacity, expired and is no longer available. 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 of April 1, 2022, cash held by our indefinitely reinvested foreign subsidiaries was $14.0 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.
We plan to use our remaining available cash and cash equivalents and short-term investments 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 and cash generated from operations 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 to do so on favorable terms or at all.
As of April 1, 2022, we had no off-balance sheet arrangements.
For additional information related to our Liquidity and Capital Resources, see Note 8 - 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the ordinary course of business, which consists primarily of interest rate risk associated with our cash and cash equivalents, short-term investments and our variable rate debt, as well as foreign exchange rate risk.
Interest rate risk. The primary objectives of our investment activity are to preserve principal, provide liquidity and invest excess cash for an average rate of return. To minimize market risk, we maintain our portfolio in cash and diversified investments, which may consist of corporate bonds, bank deposits, money market funds and commercial paper. The interest rates are variable and fluctuate with current market conditions. The risk associated with fluctuating interest rates is limited to this investment portfolio. We believe that a 10% change in interest rates would not have a material impact on our financial position or results of operations. We do not enter into financial instruments for trading or speculative purposes.
Our exposure to interest rate risk also relates to the increase or decrease in the amount of interest expense we must pay on the outstanding debt under the Credit Agreement. The interest rates on our Term Loans are variable interest rates based on our lender’s prime rate or a LIBOR rate, in each case plus an applicable margin, which exposes us to market interest rate risk when
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we have outstanding borrowings under the Credit Agreement. As of April 1, 2022, we had $120.8 million of outstanding borrowings under the Credit Agreement. Assuming our outstanding debt remains constant under the Credit Agreement for an entire year and the applicable annual interest rate increases or decreases by 1%, our annual interest expense would increase or decrease by $1.2 million. The interest rates on our 2026 Convertible Notes are fixed and therefore not subject to interest rate risk.
Foreign currency risk. To date, our international customer agreements have been denominated primarily in U.S. dollars. Accordingly, we have limited exposure to foreign currency exchange rates. The functional currency of a majority of our foreign operations continues to be in U.S. dollars with the remaining operations being local currency. Increases in the value of the U.S. dollar relative to other currencies could make our products more expensive, which could negatively impact demand in certain regions. Conversely, decreases in the value of the U.S. dollar relative to other currencies could result in our products being more expensive to certain customers and could reduce or delay orders, or otherwise negatively affect how they do business with us. The effects of exchange rate fluctuations on the net assets of the majority of our operations are accounted for as transaction gains or losses. We believe that a change of 10% in such foreign currency exchange rates would not have a material impact on our financial position or results of operations. In the future, we may enter into foreign currency exchange hedging contracts to reduce our exposure to changes in exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of April 1, 2022.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
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PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 12 - Commitments and Contingencies to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for information about our legal proceedings.
ITEM 1A. RISK FACTORS
Our business involves a high degree of risk. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2021 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. As of the date of this Quarterly Report on Form 10-Q, there have been no material changes in any of the risk factors described in our 2021 Annual Report on Form 10-K, except as noted below.
Our business and operations could suffer in the event of a security breach, cybersecurity incident or disruption of our information technology systems.
We rely on our information technology systems for the effective operation of our business and for the secure maintenance and storage of confidential data relating to our business. Although our internal information technology team actively takes steps to protect our information and operational systems, unauthorized persons or disloyal insiders may be able to penetrate our security controls, and develop and deploy viruses, worms and other malicious software programs that compromise our confidential information or that of third parties and cause a disruption or failure of our information and/or operational technology systems. In addition, we have in the past and may in the future be subject to “phishing” attacks in which third parties send emails purporting to be from reputable companies to obtain personal information and infiltrate our systems to initiate wire transfers or otherwise obtain proprietary or confidential information or disrupt operations by deploying malicious code. A number of large, public companies have recently experienced losses based on ransomware and/or phishing attacks and other cyber-attacks. Similarly, attackers could implant malicious code into software that we may purchase, and this supply chain vulnerability could disrupt our operations, compromise our data or lead to other cyber harms.
Any compromise of our information or operational technology systems could result in unauthorized publication of our confidential business or proprietary information; result in the unauthorized release of customer, supplier or employee data; lead to violations of privacy or other laws; extortion; allow competitors to profit from our intellectual property or trade secrets; delay or disrupt our operations; expose us to a risk of investigations and litigation; cause us to incur direct losses if attackers access our bank or investment accounts; undermine investor or market confidence, or damage our reputation. The direct and indirect cost and operational consequences of implementing data protection measures either as a response to specific breaches or as a result of evolving risks could be significant. In addition, our inability to use or access our information or operational systems at critical points in time could adversely affect the timely and efficient operation of our business. Any delayed sales, significant costs or lost customers resulting from a technology failure could adversely affect our business, operations and financial results.
Third parties with which we conduct business, such as foundries, assembly and test contractors and distributors, have access to certain portions of our sensitive data. In the event that these third parties do not properly safeguard our data that they hold, security breaches could result and negatively impact our business, operations and financial results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table presents information with respect to purchases of common stock we made during the fiscal quarter ended April 1, 2022.
| Period | Total Number of Shares (or Units) Purchased (1) | Average Price Paid per Share (or Unit) | 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 | |||||||||||||||||||
| January 1, 2022-January 28, 2022 | 824 | $ | 71.62 | — | — | ||||||||||||||||||
| January 29, 2022-February 25, 2022 | 112,636 | 61.27 | — | — | |||||||||||||||||||
| February 26, 2022-April 1, 2022 | 733 | 56.22 | — | — | |||||||||||||||||||
| Total | 114,193 | $ | 61.31 | — | — | ||||||||||||||||||
(1) We employ “withhold to cover” as a tax payment method for vesting of restricted stock awards for our employees, pursuant to which, we withheld from employees the shares noted in the table above to cover tax withholding related to the
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vesting of their awards. The average prices listed in the above table are averages of the fair market prices at which we valued shares withheld for purposes of calculating the number of shares to be withheld.
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ITEM 6. EXHIBITS
Exhibit Number | Description | ||||||||||
| 3.1 | |||||||||||
| 3.2 | |||||||||||
| 31.1 | |||||||||||
| 31.2 | |||||||||||
| 32.1 | |||||||||||
| 101 | The following material from the Quarterly Report on Form 10-Q of MACOM Technology Solutions Holdings, Inc. for the fiscal quarter ended April 1, 2022, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements and (vii) document and entity information, tagged as blocks of text and including detailed tags. | ||||||||||
| 104 | The cover page for the Quarterly Report on Form 10-Q of MACOM Technology Solutions Holdings, Inc. for the fiscal quarter ended April 1, 2022, formatted in Inline XBRL and included as Exhibit 101 | ||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
| MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC. | ||||||||
| Dated: April 28, 2022 | By: | /s/ Stephen G. Daly | ||||||
| Stephen G. Daly | ||||||||
| President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| Dated: April 28, 2022 | By: | /s/ John F. Kober | ||||||
| John F. Kober | ||||||||
| Senior Vice President and Chief Financial Officer (Principal Accounting and Principal Financial Officer) | ||||||||