Description of Business, Basis of Presentation and Accounting (Policies) | 6 Months Ended |
Apr. 03, 2015 |
Accounting Policies [Abstract] | |
Description of Business | Description of Business—M/A-COM Technology Solutions Holdings, Inc. (MACOM or the Company) was incorporated in Delaware on March 25, 2009. MACOM is a leading provider of high-performance analog semiconductor solutions that enable next-generation internet applications, the cloud connected apps economy, and the modern, networked battlefield across the radio frequency (RF), microwave and millimeterwave spectrum and photonic semiconductor products. Headquartered in Lowell, Massachusetts, MACOM has offices in North America, Europe, Asia and Australia. |
The Company has one reportable operating segment which designs, develops, manufactures and markets semiconductors and modules. |
Basis of Presentation | Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. |
Under the Jumpstart Our Business Startups Act (JOBS Act), the Company qualified as an emerging growth company. Accordingly, the Company elected to avail itself of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. We expect to cease being an emerging growth company at the end of fiscal year 2015, which will, among other things, require us to fully comply with Section 404 of the Sarbanes-Oxley Act of 2002 including obtaining an auditor attestation of our internal controls. |
The Company’s fiscal year ends on the Friday closest to the last day of September. For fiscal years in which there are 53 weeks, the first quarter reporting period includes 14 weeks. Fiscal year 2015 is 52 weeks in length and the three and six months ended April 3, 2015 include 13 and 26 weeks, respectively. Fiscal year 2014 was 53 weeks in length and the three and six months ended April 4, 2014 include 13 and 27 weeks, respectively. The accompanying condensed consolidated financial statements are referred to as “consolidated” for all periods presented. |
On December 15, 2014, MACOM completed the acquisition of BinOptics Corporation (BinOptics), a supplier of high-performance photonic products (BinOptics Acquisition). The BinOptics Acquisition was accounted for as a purchase and the operations of BinOptics have been included in MACOM’s condensed consolidated financial statements since December 15, 2014, the date of acquisition. |
MACOM acquired Nitronex, LLC (Nitronex) in a common-control business combination on February 13, 2014 (Nitronex Acquisition). Nitronex, a supplier of high-performance gallium nitride (GaN) semiconductors for RF, microwave and millimeterwave applications, was previously acquired by GaAs Labs, LLC (GaAs Labs) on June 25, 2012. Prior to the Nitronex Acquisition, GaAs Labs was a stockholder in MACOM, and GaAs Labs, Nitronex and MACOM were under common control from June 25, 2012 through February 13, 2014 due to a common controlling stockholder. The accompanying consolidated financial statements for the three months and six months ended April 4, 2014, combine MACOM’s historical consolidated financial statements with the historical financial statements of Nitronex from January 3, 2014 through April 4, 2014 and September 28, 2013 through April 4, 2014, and have been presented in a manner similar to a pooling-of-interests to include the results of operations of each business since the date of common control. |
On December 18, 2013, MACOM completed the acquisition of Mindspeed Technologies, Inc. (Mindspeed), a supplier of high-performance analog semiconductor solutions for communications infrastructure applications (Mindspeed Acquisition). The Mindspeed Acquisition was accounted for as a purchase, and the operations of Mindspeed have been included in MACOM’s consolidated financial statements since December 18, 2013, the date of acquisition. |
These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2014, filed with the SEC on December 9, 2014. |
In the opinion of management, the accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year 2015. |
Principles of Consolidation | Principles of Consolidation—The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Prior to the Nitronex Acquisition, MACOM and Nitronex did not have material intracompany transactions. |
Use of Estimates | Use of Estimates—The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities during the reporting periods, the reported amounts of revenue and expenses during the reporting periods, and the disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, the Company bases estimates and assumptions on historical experience, currently available information and various other factors that management believes to be reasonable under the circumstances. Actual results may differ materially from these estimates and assumptions. |
Discontinued Operations | Discontinued Operations—In the second quarter of fiscal year 2014, the Company sold assets of the non-core wireless business of Mindspeed and presented the divested businesses as assets held for sale as of the date of the Mindspeed Acquisition. The operating results of the business are reflected in discontinued operations. |
Foreign Currency Translation and Remeasurement | Foreign Currency Translation and Remeasurement—The Company’s consolidated financial statements are presented in U.S. dollars. While the majority of the Company’s foreign operations use the U.S. dollar as the functional currency, the financial statements of the Company’s foreign operations for which the functional currency is not the U.S. dollar are translated into U.S. dollars at the exchange rates in effect at the balance sheet dates (for assets and liabilities) and at average exchange rates (for revenue and expenses). The unrealized translation gains and losses on the net investment in these foreign operations are accumulated as a component of other comprehensive loss. |
The financial statements of the Company’s foreign operations where the functional currency is the U.S. dollar, but where the underlying transactions are transacted in a different currency, are re-measured at the exchange rate in effect at the balance sheet date with respect to monetary assets and liabilities. Nonmonetary assets and liabilities, such as inventories and property and equipment and related statements of operations accounts, such as cost of revenue and depreciation, are remeasured at historical exchange rates. Revenue and expenses, other than cost of revenue, amortization and depreciation, are translated at the average exchange rate for the period in which the transaction occurred. The net gains (losses) on foreign currency remeasurement are reflected in selling, general and administrative expense in the accompanying Condensed Consolidated Statements of Operations. The Company’s recognized net gains and losses on foreign exchange are included in selling, general and administrative expense and for all periods presented were immaterial. |
Revenue Recognition | Revenue Recognition—The Company recognizes revenue when: (i) persuasive evidence of an arrangement exists; (ii) delivery or services have been rendered; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured. The Company recognizes revenue with the transfer of title and risk of loss and provides for reserves for returns and other allowances. |
|
The Company generally does not provide customers other than distributors the right to return product, with the exception of warranty related matters. Accordingly, the Company does not typically maintain a reserve for customers. Shipping and handling fees billed to customers are recorded as revenue while the related costs are classified as a component cost of revenue. The Company provides warranties for its products and accrues the cost of warranty claims in the period the related revenue is recorded. |
|
Prior to fiscal 2015, the Company had concluded that it had insufficient information as well as limited experience in estimating the effect of the right of distributors to return product and price protection and, accordingly, used the sell through approach of revenue recognition. Under this approach, the Company would recognize revenue from sales after the distributor resold the product to its end customer (the sell through basis). After concluding an extensive three year study of distributor related transactions, the Company completed an evaluation of its revenue recognition policy and concluded that it was more appropriate to recognize revenue to distributors at the time of shipment to the distributor (sell-in basis). The Company believes it now has sufficient data to predict future price adjustments from distributors and has a basis of being able to reasonably estimate these future price adjustments. |
|
On a consolidated basis, revenue from distribution customers impacted by the change in estimate accounts for approximately 10-15% of total consolidated revenue. Certain agreements with distribution customers provide for rights of return and compensation credits until such time as the Company’s products are sold by the distributors to their end customers. The Company has agreements with some distribution customers for various programs, including compensation, volume-based pricing, obsolete inventory, new products and stock rotation. Sales to these distribution customers, as well as the existence of compensation programs, are in accordance with terms set forth in written agreements with these distribution customers. In general, credits allowed under these programs are capped based upon individual distributor agreements. The Company records charges associated with these programs as a reduction of revenue at the time of sale with a corresponding adjustment to accounts receivables based upon historical activity. The Company’s policy is to use a twelve month rolling historical experience rate as well as an estimated general reserve percentage in order to estimate the necessary allowance to be recorded. The Company changed its revenue recognition policy from a sell through to a sell-in approach during the first fiscal quarter of 2015. The Company recognizes revenue when criteria for FASB ASC 605-15-25 are met. |
|
During the first fiscal quarter of 2015, the Company recorded corresponding adjustments related to this change in estimate to recognize previously deferred revenues. The net effect was an increase of $15.1 million, of which $12.4 million was from previously deferred revenue and $2.7 million was related to the change in distributor inventories. Additionally, the Company recognized the related deferred inventory costs of $4.7 million which resulted in a reduction to net loss of $8.5 million, or a reduction of $0.18 net loss per share when the change in estimate was recorded. During the three months ended April 3, 2015, this change in estimate resulted in revenue of $3.7 million and a reduction in net loss of $0.3 million, or $0.01 reduction of net loss per share, respectively. During the six months ended April 3, 2015, this change in estimate resulted in revenue of $18.8 million and a reduction in net loss of $8.8 million, or $0.18 reduction of net loss per share, respectively. |
|
|
|
The Company also established a new reserve of $5.5 million during the first quarter of fiscal year 2015 which was increased to $6.5 million for the quarter ended April 3, 2015 related to future rebates and returns under various programs associated with our distributor agreements. The amount of this reserve is largely driven by the individual distribution agreements and the Company’s business strategy whereby the Company will invoice the distributor at “list price”. The Company expects to issue compensation credits consistent with the distributor agreements. The difference between the list price and distributor selling price will vary by product grouping consistent with historical trends and marketing strategies. Historically, 90 percent of the credits issued to distributors are based on “list price” credits and 10 percent of the credits were for product returns and stock rotation rights, based upon the twelve month rolling historical experience rate. |
|
The table below shows the changes in gross and net distributor revenue and reserve balances associated with the change in estimate for the three and six months ended April 3, 2015: |
|
|
| | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | January 2, | | | April 3, | | | April 3, 2015 | |
2015 | 2015 |
Gross revenue effect of one-time change in estimate (1) | | $ | 17 | | | | — | | | $ | 17 | |
Gross revenue effect associated with change in estimate (2) | | | 3.6 | | | | 4.7 | | | | 8.3 | |
| | | | | | | | | | | | |
Total gross revenue resulting from change in estimate | | $ | 20.6 | | | $ | 4.7 | | | $ | 25.3 | |
| | | | | | | | | | | | |
Net revenue effect of one-time change in estimate (3) | | $ | 12.4 | | | | — | | | | 12.4 | |
Net revenue effect associated with change in estimate (4) | | | 2.7 | | | | 3.7 | | | | 6.4 | |
| | | | | | | | | | | | |
Total net revenue resulting from change in estimate | | $ | 15.1 | | | $ | 3.7 | | | $ | 18.8 | |
| | | | | | | | | | | | |
Reserve for future returns and credits (5) | | ($ | 5.5 | ) | | ($ | 1 | ) | | ($ | 6.5 | ) |
|
|
-1 | This amount was recorded as deferred revenue as of October 3, 2014. | | | | | | | | | | | |
-2 | This amount represents the gross revenue impact of the change in estimate associated with increases in distributor inventories as compared to the prior reporting period. | | | | | | | | | | | |
-3 | This amount represents the net revenue impact of the one-time change in estimate after applying the associated reserve for future credits and returns. | | | | | | | | | | | |
-4 | This amount represents the net revenue impact of the change in estimate associated with increases in distributor inventories as compared to the prior reporting period after applying the associated reserve for future credits and returns. | | | | | | | | | | | |
-5 | This amount reflects the change in the revenue reserve for future returns and credits. The balance as of April 3, 2015 is $6.5 million. | | | | | | | | | | | |
Recent Accounting Standards | Recent Accounting Standards — |
In April 2014, the FASB issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08), which raises the threshold for disposals to qualify as discontinued operations. A discontinued operation is defined as: (1) a component of an entity or group of components that has been disposed of or classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results; or (2) an acquired business that is classified as held for sale on the acquisition date. ASU 2014-08 also requires additional disclosures regarding discontinued operations, as well as material disposals that do not meet the definition of discontinued operations. The application of this guidance is prospective from the date of adoption and applies only to disposals (or new classifications to held for sale) that have not been reported as discontinued operations in our previously issued financial statements. |
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 sets forth a new revenue recognition model that requires identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price to performance obligations and recognizing the revenue upon satisfaction of performance obligations. The amendments in the ASU can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of the initial application along with additional disclosures. The Company is currently evaluating the impact of ASU 2014-09, which is effective for the Company in our fiscal year beginning on September 30, 2017. |
In June 2014, the FASB issued ASU 2014-12—Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) which addresses how to account for share-based performance awards including determining rendering service on the date the performance target is achieved. The Company is currently evaluating the impact of ASU 2014-12, which is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015. |
In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis. ASU 2015-02 address concerns regarding the current accounting for consolidation of certain legal entities. A reporting entity may apply the amendments in this Update using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The Company is currently evaluating the impact of ASU 2015-02, which is effective for the Company in our fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. |
|
In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company is currently evaluating the impact of ASU 2015-03, which is effective for the Company in our fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. |