I want to be happy for these guys. I really do. I want to repeat after all my other sellside peers who say 'nice work guys coming in-line for Sep-Q and delivering in-line guidance for the Dec-Q'.
But, as usual with MSCC, the seemingly good numbers need a scrub.
Problem 1: MSCC made the quarter thanks to a giant sequential step up in the Aero & Defense business. Now, I am not a conspiracist, but isn’t it a bit strange that MSCC's best sequential A&D growth in maybe a decade happened in the same quarter in which MSCC recognized a large incremental revenue gain from an acquisition they are trying to keep quiet? Especially – especially, when the latest read on defense budget walks down growth estimates (consult Hedgeye’s awesome General Emo Gardner for more details: ), AND, when checks into the category are disappointing relative to just a few months ago. Based on the filings, the Phonon deal size seems to be in the range of ~$40m, but maybe Jimmy P only paid 0.5x revenue? If I had to guess, Phonon might be a ~$20m per Q revenue company which would explain the big jump in A&D. Management: how can we know if you won’t tell us? In filings with the SEC please!
Problem 2: at the last EPS announcement you promised a $250m buyback…yet diluted share count went up q/q and it seems you didn’t buy any shares. Why did you announce a $250m authorization last Q for a buyback if you never intended to spend it? Guess we will have to wait for the 10-K to see exactly what happened.
Additional problems with tonight's results:
- Good/record non-GAAP GM % was helped by add back of Phonon inventory profit write down
- GAAP OP is still well less than half of non-GAAP OP
- EPS beat by $0.01 due to lower tax rate (rate dropped from 7.5% to 7.0%)
- OCF: nice work! But it was supported by a 19% q/q increase in 2 working capital lines (payables and accrued liabilities) which we all know is not sustainable. Days Payables jumped nearly 20 days sequentially to a level MSCC has not had in many years.
- Paid $41m in debt extinguishment costs in F17 to lower gross debt by $383m…those are not good economics as it implies the real cost for MSCC to borrow is much higher than the nominal coupon rate
Lastly – you made a big point about not discussing the Vectron deal on the call. Why? The management team on the other side of the transaction discussed it. The deal is announced. Maybe if there is some special collar or sensitive ESOP program cancellation being negotiated you should steer clear of those specific particulars. But why not give us the reason for the deal at the very least? Or at best, explain why you promised organic quarters in 2HFY17 and all you keep doing is buying more stuff?
Arhhhh. I was really hoping to leave this one alone for a little while. It had the air of a semis laggard, a group that has done quite well lately, and I thought management would be able to pull off a decent quarter. By all normal, shallow observations, they did. So why can’t I leave this alone? Because when I strip off the veneer I see the truth underneath and it's...much less attractive than the message being steered by management. The stock is 19x trailing FCF...but forward FCF likely goes down. Something to think about.
