Semtech Corp: Form 10-Q for the period ended Jul 28, 2024

The following "Management’s Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with our interim unaudited condensed consolidated financial statements and the accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this "Quarterly Report") and "Special Note Regarding Forward-Looking and Cautionary Statements" in this Quarterly Report as well as “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2024 filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2024.

Our interim unaudited condensed consolidated balance sheets are referred to herein as the "Balance Sheets" and interim unaudited condensed consolidated statements of operations are referred to herein as the "Statements of Operations." Amounts and percentages may not add precisely due to rounding.

Overview

Semtech Corporation (together with its consolidated subsidiaries, the "Company," "we," "our" or "us") is a high-performance, semiconductor, Internet of Things ("IoT") systems and cloud connectivity service provider. We have three operating segments—Signal Integrity, Analog Mixed Signal and Wireless, and IoT Systems and Connectivity—that represent three separate reportable segments. Prior to the fourth quarter of fiscal year 2024, the Company had four operating segments—Signal Integrity, Advanced Protection and Sensing, IoT Systems and IoT Connected Services. In the fourth quarter of fiscal year 2024, as a result of organizational restructuring, the wireless business, which was previously included in the former IoT Systems operating segment, and the software defined video over ethernet business, which was previously included in the Signal Integrity operating segment, were moved into the Analog Mixed Signal and Wireless operating segment, formerly the Advanced Protection and Sensing operating segment, which also includes the proximity sensing, power and protection businesses. In the first quarter of fiscal year 2025, as a result of organizational restructuring, the Company combined the IoT Systems operating segment and the IoT Connected Services operating segment into the newly formed IoT Systems and Connectivity operating segment. As a result of the reorganization, the Company has three reportable segments. All prior year information in the tables below has been revised retrospectively to reflect the change to the Company's reportable segments. See Part I, Item 1, Note 15, Segment Information, to our interim unaudited condensed consolidated financial statements for additional information on our reportable segments.

Signal Integrity. We design, develop, manufacture and market a portfolio of optical and copper data communications and video transport products used in a wide variety of infrastructure and industrial applications. Our comprehensive portfolio includes integrated circuits ("ICs") for data centers, enterprise networks, passive optical networks ("PON"), and wireless base station optical transceivers. Our high-speed interfaces range from 100Mbps to 1.6Tbps and support key industry standards such as Fibre Channel, InfiniBand, Ethernet, PON and synchronous optical networks. Our video products offer advanced solutions for next generation high-definition broadcast applications.

Analog Mixed Signal and Wireless. We design, develop, manufacture and market high-performance protection devices, which are often referred to as transient voltage suppressors ("TVS") and specialized sensing products. TVS devices provide protection for electronic systems where voltage spikes (called transients), such as electrostatic discharge, electrical over stress or secondary lightning surge energy, can permanently damage sensitive ICs. Our portfolio of protection solutions include filter and termination devices that are integrated with the TVS device. Our products provide robust protection while preserving signal integrity in high-speed communications, networking and video interfaces. These products also operate at very low voltage. Our protection products can be found in a broad range of applications including smart phones, LCD and organic light-emitting diode TVs and displays, set-top boxes, monitors and displays, tablets, computers, notebooks, base stations, routers, automobile and industrial systems. Our unique sensing technology enables proximity sensing and advanced user interface solutions for our mobile and consumer products. We also design, develop, manufacture and market a portfolio of specialized radio frequency products used in a wide variety of industrial, medical and communications applications. Our wireless products, which include our LoRa® devices and wireless radio frequency technology ("LoRa Technology"), feature industry leading and longest range industrial, scientific and medical radio, enabling a lower total cost of ownership and increased reliability. These features make these products particularly suitable for machine-to-machine and IoT applications. We also design, develop, and market power product devices that control, alter, regulate, and condition the power within electronic systems focused on the LoRa and IoT infrastructure segment. The highest volume product types within this category are switching voltage regulators, combination switching and linear regulators, smart regulators, isolated switches, and wireless charging. Our video products offer advanced solutions for highly differentiated audio video-over-IP technology for professional audio video applications.

IoT Systems and Connectivity. We design, develop, operate and market a comprehensive product portfolio of IoT solutions that enable businesses to connect and manage their devices, collect and analyze data, and improve decision-making. The portfolio includes a wide range of modules, gateways, routers, and connected services that are designed to meet the specific needs of different industries and applications. Our modules are available in a variety of form factors and connectivity options, including LTE-M, NB-IoT and 5G, and can be integrated into an array of devices and systems. Our gateways and routers are designed to provide reliable and secure connectivity for IoT devices, while our connected services enable businesses to manage devices and connectivity so businesses can navigate the complex IoT landscape and realize the full potential of connected devices. We also design, develop, operate and market a portfolio of connected services used in a wide variety of industrial, medical and communications applications. Our connected services include wireless connectivity and cloud-based services for customers to deploy, connect, and operate their end applications. Our services have been purpose-built for IoT applications and include features such as SIM and subscription management, device and data management, geolocation support, as well as reporting and alerting that can be configured or tailored to a variety of IoT use cases.

Our net sales by reportable segment were as follows:

(in thousands)

We design, develop, manufacture and market a wide range of products for commercial applications, the majority of which are sold into the infrastructure, high-end consumer and industrial end markets.

Infrastructure: data centers, PON, base stations, optical networks, servers, carrier networks, switches and routers, cable modems, wireless local area network and other communication infrastructure equipment.

High-End Consumer: smartphones, tablets, wearables, desktops, notebooks, and other handheld products, wireless charging, set-top boxes, digital televisions, monitors and displays, digital video recorders and other consumer equipment.

Industrial: IoT applications, analog and digital video broadcast equipment, video-over-IP solutions, automated meter reading, smart grid, wireless charging, medical, security systems, automotive, industrial and home automation and other industrial equipment.

Our end customers for our silicon solutions are primarily original equipment manufacturers that produce and sell technology solutions. Our IoT module, router, gateways and managed connectivity solutions ship to IoT device makers and enterprises to provide IoT connectivity to end devices.

Recent Developments

Leadership Changes

Effective June 6, 2024, our board of directors (the “Board” or “Board of Directors”) appointed Hong Q. Hou, a current member of our Board, to serve as our President and Chief Executive Officer. Mr. Hou succeeded Paul Pickle as our President and Chief Executive Officer on such date.

Convertible Note Exchange

On July 11, 2024 and July 15, 2024, we entered into separate, privately negotiated exchange agreements (the “Exchange Agreements”) with certain holders of our 4.00% Convertible Senior Notes due 2028 (the “2028 Notes”). Pursuant to the Exchange Agreements, on July 24, 2024 certain holders exchanged with us approximately $188.1 million in aggregate principal amount of the 2028 Notes held by them for an aggregate of 10,378,431 shares of our common stock, which number of shares was determined over an averaging period that commenced on July 12, 2024. We accounted for these exchange transactions as a partial debt extinguishment and recognized a loss on extinguishment of debt equal to the difference between the fair value of our common stock delivered to certain holders of the 2028 Notes and the carrying value of the outstanding debt, accrued interest and third-party fees related to the Exchange Agreements. In the three and six months ended July 28, 2024, in connection with the exchange transactions, we recognized $144.7 million of loss included in "Loss on extinguishment of debt" in the Statements of Operations and $5.5 million of loss resulting from the write-off of deferred financing costs included in "Interest expense" in the Statements of Operations.

Impact of Macroeconomic Conditions

In recent periods, macroeconomic factors such as market volatility, inflationary pressures, elevated interest rates, geopolitical tensions and recessionary concerns have caused uncertainty in end customer demand, which resulted in elevated channel inventories. We believe that we can continue to take appropriate actions to align our inventory levels with anticipated customer demand profiles.

Factors Affecting Our Performance

Most of our sales to customers are made on the basis of individual customer purchase orders and many customers include cancellation provisions in their purchase orders. We rely on orders received and shipped within the same quarter for a meaningful portion of our sales. Net sales made through independent distributors during the second quarters of fiscal years 2025 and 2024 were 74% and 64%, respectively, of net sales and the remainder were made directly to customers. The higher percentage of distributor sales in the second quarter of fiscal year 2025 was primarily due to product mix as certain of our products are shipped in higher volume to distributors.

We are a global business with customers and suppliers around the world. A significant amount of our third-party subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located outside the United States, including China and Taiwan. A significant amount of our assembly and test operations are conducted by third-party contractors located outside the United States, including China, Malaysia, Mexico, Taiwan and Vietnam. Net sales outside the United States constituted 80% and 77% during the second quarters of fiscal years 2025 and 2024, respectively. Approximately 65% and 62% of our net sales during the second quarters of fiscal years 2025 and 2024, respectively, were to customers located in the Asia-Pacific region. We are subject to export restrictions and trade regulations, which have limited our ability to sell to certain customers in certain regions.

We use several metrics as indicators of future potential growth. The indicators that we believe best correlate to potential future sales growth are design wins and new product releases. There are many factors that may cause a design win or new product release to not result in sales, including a customer's decision not to go to system production, a change in a customer’s perspective regarding a product’s value or a customer’s product failing in the end market. As a result, although a design win or new product introduction is an important step towards generating future sales, it does not necessarily result in us being awarded business or receiving a purchase commitment.

Inflationary factors have in the past and could continue to affect our future performance if we are unable to pass higher costs on to our customers.

Results of Operations

The following table sets forth, for the periods indicated, our Statements of Operations expressed as a percentage of net sales.

Our regional mix of loss before taxes and equity method (loss) income was as follows:

(in thousands)

Domestic performance includes higher levels of share-based compensation compared to foreign operations.

Comparison of the Three Months Ended July 28, 2024 and July 30, 2023

Net Sales

The following table summarizes our net sales by major end markets:

(in thousands, except percentages)

Net sales in the second quarter of fiscal year 2025 were $215.4 million, a decrease of 9.7% compared to $238.4 million in the second quarter of fiscal year 2024, which was primarily driven by lower net sales from our industrial end market related to decreased sales volume and pricing pressures, offset by higher net sales in our infrastructure and high-end consumer end markets due to stronger demand. Net sales from our infrastructure end market increased $10.6 million in the second quarter of fiscal year 2025 compared to the second quarter of fiscal year 2024, primarily driven by a $7.3 million increase in data center sales and a $6.7 million increase in PON sales, partially offset by a $2.9 million decrease in TVS infrastructure product sales. Net sales from our high-end consumer end market increased $3.1 million in the second quarter of fiscal year 2025 compared to the second quarter of fiscal year 2024, primarily driven by an increase in TVS consumer product sales. Net sales from our industrial end market decreased $36.7 million in the second quarter of fiscal year 2025 compared to the second quarter of fiscal year 2024, primarily driven by a $43.3 million decrease in module sales, a $2.8 million decrease in router sales and a $1.5 million decrease in TVS industrial product sales, partially offset by a $12.0 million increase in LoRa-enabled sales in industrial applications.

The following table summarizes our net sales by reportable segment:

(in thousands, except percentages)

Net sales in the second quarter of fiscal year 2025, as compared to the second quarter of fiscal year 2024, were impacted by softer demand in the IoT Systems and Connectivity reportable segment, which contributed to lower sales volume and pricing pressures, but benefited from stronger demand in the Signal Integrity and Analog Mixed Signal and Wireless reportable segments. Net sales from Signal Integrity increased $13.3 million in the second quarter of fiscal year 2025 compared to the second quarter of fiscal year 2024 primarily driven by a $7.3 million increase in data center sales and a $6.7 million increase in PON sales, partially offset by a $0.5 million decrease in wireless sales and a $0.5 million decrease in broadcast sales. Net sales from Analog Mixed Signal and Wireless increased $9.3 million in the second quarter of fiscal year 2025 compared to the second quarter of fiscal year 2024, primarily driven by a $10.3 million increase in LoRa-enabled product sales. Net sales from IoT Systems and Connectivity decreased $45.6 million in the second quarter of fiscal year 2025 compared to the second quarter of fiscal year 2024 primarily driven by a $43.3 million decrease in module sales and a $2.8 million decrease in router sales, partially offset by a $0.9 million increase in managed connectivity sales.

Gross Profit

The following table summarizes our gross profit and gross margin by reportable segment:

(in thousands, except percentages)

In the second quarter of fiscal year 2025, gross profit increased $4.7 million to $105.5 million from $100.7 million in the second quarter of fiscal year 2024. This increase was primarily driven by a $9.2 million increase from Signal Integrity, which experienced higher sales led by data center and 10G PON due to stronger demand, offset by pricing pressures, a $8.3 million decrease in the amortization of acquired technology intangible assets related to the acquisition of all of the issued and outstanding common shares of Sierra Wireless, Inc. on January 12, 2023 (the "Sierra Wireless Acquisition") due to impairments in the fourth quarter of fiscal year 2024, a $3.3 million decrease in amortization of inventory step-up due to the finalization of measurement period adjustments in the second quarter of fiscal year 2024 related to the Sierra Wireless Acquisition, a $2.7 million decrease for transaction and integration costs related to the Sierra Wireless Acquisition, and a $2.3 million increase from Analog Mixed Signal and Wireless, which experienced higher sales led by LoRa-enabled product due to stronger demand, offset by pricing pressures, partially offset by a $20.2 million decrease from IoT Systems and Connectivity due to lower module and router sales primarily driven by soft demand causing decreased sales volume and pricing pressures.

Our gross margin was 49.0% in the second quarter of fiscal year 2025, compared to 42.3% in the second quarter of fiscal year 2024. Gross margin for our Signal Integrity segment was 61.9% in the second quarter of fiscal year 2025, compared to 59.8% in the second quarter of fiscal year 2024, primarily due to higher volume reducing overhead. Gross margin for our Analog Mixed Signal and Wireless segment was 57.2% in the second quarter of fiscal year 2025, compared to 61.6% in the second quarter of fiscal year 2024, primarily due to unfavorable product mix, partially offset by higher overhead absorption. Gross margin for our IoT Systems and Connectivity segment was 35.4% in the second quarter of fiscal year 2025, compared to 38.7% in the second quarter of fiscal year 2024, primarily due to pricing pressures.

Operating Expenses, net

The following table summarizes our operating expenses, net:

(in thousands, except percentages)

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $3.8 million in the second quarter of fiscal year 2025 compared to the second quarter of fiscal year 2024 primarily as a result of a $5.8 million decrease in transaction and integration costs primarily related to the Sierra Wireless Acquisition and $1.0 million lower net staffing-related costs, which reflects lower headcount due to recent restructuring, offset by an increase in share-based compensation, partially offset by $1.8 million higher depreciation and a $0.8 million increase in facilities expenses.

Product Development and Engineering Expenses

Product development and engineering expenses decreased $7.3 million in the second quarter of fiscal year 2025 compared to the second quarter of fiscal year 2024 primarily as a result of a $6.3 million net decrease in staffing-related costs due to lower headcount and a $2.1 million decrease in new product introduction expenses, partially offset by a $1.4 million increase in depreciation. The levels of product development and engineering expenses reported in a fiscal period can be significantly impacted, and therefore experience period over period volatility, by the number of new product tape-outs and by the timing of recoveries from non-recurring engineering services, which are typically recorded as a reduction to product development and engineering expense.

Intangible Amortization

Intangible amortization decreased by $4.6 million in the second quarter of fiscal year 2025 compared to the second quarter of fiscal year 2024 due to impairment of intangible assets acquired in the Sierra Wireless Acquisition related to customer relationships and trade name in the fourth quarter of fiscal year 2024. The amortization of acquired technology intangible assets is reflected in cost of sales.

Restructuring

Restructuring decreased by $7.9 million in the second quarter of fiscal year 2025 compared to the second quarter of fiscal year 2024 due to the structural reorganization actions primarily in the prior year period to reduce our workforce as a result of cost-saving measures and internal resource alignment including from the realization of synergies of the Sierra Wireless Acquisition.

Goodwill Impairment

There was no goodwill impairment in the second quarter of fiscal year 2025 compared to $279.6 million of goodwill impairment in the second quarter of fiscal year 2024 due to valuation adjustments of goodwill related to the Sierra Wireless Acquisition. See Note 8, Goodwill and Intangible Assets, to our interim unaudited condensed consolidated financial statements for additional information.

Interest Expense

Interest expense, including amortization and a write-off of deferred financing costs, was $28.6 million and $24.2 million for the second quarters of fiscal years 2025 and 2024, respectively. The increase was primarily due to a $5.5 million write-off of deferred financing costs as a result of approximately $188.1 million of 2028 Notes extinguished in exchange for common stock in the second quarter of fiscal year 2025.

Loss on Extinguishment of Debt

In addition to the write-off of $5.5 million of deferred financing costs as a result of approximately $188.1 million of 2028 Notes extinguished in exchange for common stock in the second quarter of fiscal year 2025, which was recorded in "Interest expense" in the Statements of Operations, we recognized a loss on extinguishment of debt equal to the difference between the fair value of our common stock delivered to certain holders of the 2028 Notes and the carrying value of the outstanding debt, accrued interest and third-party fees related to the Exchange Agreements. In the second quarter of fiscal year 2025, in connection with the exchange transactions, we recognized $144.7 million of loss included in "Loss on extinguishment of debt" in the Statements of Operations.

Investment Impairments and Credit Loss Reserves, Net

During the second quarter of fiscal year 2025, we did not record any investment impairments and credit loss reserves. During the second quarter of fiscal year 2024, investment impairments and credit loss reserves, net totaled a loss of $0.2 million due to adjustments to our credit loss reserve for our available-for-sale debt securities.

Provision for Income Taxes

We recorded income tax expense of $4.2 million in the second quarter of fiscal year 2025, compared to income tax expense of $56.6 million in the second quarter of fiscal year 2024. The effective tax rates for the second quarters of fiscal years 2025 and 2024 were provision rates of 2.5% and 17.4%, respectively. The effective tax rates in the second quarters of fiscal years 2025 and 2024 differ from the statutory federal income tax rate of 21% primarily due to a regional mix of income, changes in valuation allowance, impact of global intangible low-taxed income ("GILTI"), research and development ("R&D") credits and nondeductible loss on extinguishment of debt. The Tax Cuts and Jobs Act ("Tax Act") requires R&D costs incurred for tax years beginning after December 31, 2021 to be capitalized and amortized ratably over five or fifteen years for tax purposes, depending on where the research activities are conducted. We have elected to treat GILTI as a period cost and the additional capitalization of R&D costs within GILTI increases our provision for income taxes.

During the second quarter of fiscal year 2024, we recorded a valuation allowance against our U.S. deferred tax assets of approximately $52.8 million. We are required to assess whether a valuation allowance should be recorded against our deferred tax assets ("DTAs") based on the consideration of all available evidence, using a "more likely than not" realization standard. The four sources of taxable income that must be considered in determining whether DTAs will be realized are: (1) future reversals of existing taxable temporary differences (i.e. offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the tax law; (3) tax planning strategies; and (4)

future taxable income exclusive of reversing temporary differences and carryforwards.

After a review of the four sources of taxable income described above and in view of our three-year cumulative loss, we were not able to conclude that it is more likely than not that our DTAs will be realized. As a result, we recorded an additional valuation allowance on our DTAs, with a corresponding charge to our income tax provision, of approximately $52.8 million during the second quarter of fiscal year 2024.

We receive a tax benefit from a tax holiday that was granted in Switzerland. The tax holiday commenced on January 30, 2017, and was effective for five years (the "Initial Term"). Since we met certain staffing targets, the holiday has been extended for an additional five years commencing on January 31, 2022. The maximum benefit under this tax holiday is CHF 500.0 million of cumulative after tax profit, which equates to a maximum potential tax savings of CHF 44.0 million. The extended term of the tax holiday is effective until fiscal year 2027. However, Switzerland implemented the Organization of Economic Co-operation and Development's ("OECD") global minimum tax ("Pillar Two") rules effective from January 1, 2024. Based on the administrative guidance issued by OECD in December 2023, we have determined that Pillar Two rules are applicable in the current fiscal year; therefore, we do not benefit from the tax holiday.

As a global organization, we are subject to audit by taxing authorities in various jurisdictions. To the extent that an audit, or the closure of a statute of limitations, results in adjusting our reserves for uncertain tax positions, our effective tax rate could experience extreme volatility since any adjustment would be recorded as a discrete item in the period of adjustment.

For further information on the effective tax rate and the Tax Act’s impact, see Note 10, Income Taxes, to our interim unaudited condensed consolidated financial statements.

Comparison of the Six Months Ended July 28, 2024 and July 30, 2023

Net Sales

The following table summarizes our net sales by major end market:

(in thousands, except percentages)

Net sales for the first six months of fiscal year 2025 were $421.5 million, a decrease of 11.3% compared to $474.9 million for the first six months of fiscal year 2024 primarily driven by lower net sales from our industrial end market related to decreased sales volume and pricing pressures. Comparing the same periods, our infrastructure and high-end consumer end markets had stronger demand and resulting net sales. Net sales from our infrastructure end market increased $27.6 million in the first six months of fiscal year 2025 compared to the first six months of fiscal year 2024, primarily driven by a $17.3 million increase in PON sales and a $15.3 million increase in data center sales, partially offset by a $4.4 million decrease in TVS infrastructure product sales. Net sales from our high-end consumer end market increased $16.0 million in the first six months of fiscal year 2025 compared to the first six months of fiscal year 2024, primarily driven by a $16.9 million increase in TVS consumer product sales and a $3.3 million increase in proximity sensing sales, partially offset by a $2.8 million decrease in LoRa-enabled sales in consumer applications. Net sales from our industrial end market decreased $97.0 million in the first six months of fiscal year 2025 compared to the first six months of fiscal year 2024, primarily driven by an $89.9 million decrease in module sales, a $19.6 million decrease in router sales and a $3.0 million decrease in TVS industrial product sales, partially offset by a $15.4 million increase in LoRa-enabled sales in industrial applications.

The following table summarizes our net sales by reportable segment:

(in thousands, except percentages)

46

Net sales in the first six months of fiscal year 2025, compared to the first six months of fiscal year 2024, were impacted by softer demand in the IoT Systems and Connectivity reportable segment, which contributed to lower sales volume and pricing pressures, but benefited from stronger demand in the Signal Integrity and Analog Mixed Signal and Wireless reportable segments. Net sales from Signal Integrity increased $30.7 million in the first six months of fiscal year 2025 compared to the first six months of fiscal year 2024, primarily driven by a $17.3 million increase in PON sales and a $15.3 million increase in data center sales, partially offset by a $1.7 million decrease in broadcast sales. Net sales from Analog Mixed Signal and Wireless increased $25.0 million in the first six months of fiscal year 2025 compared to the first six months of fiscal year 2024, primarily driven by a $12.6 million increase in LoRa-enabled sales, a $9.4 million increase in TVS product sales, and a $3.3 million increase in proximity sensing sales. Net sales from IoT Systems and Connectivity decreased $109.2 million in the first six months of fiscal year 2025 compared to the first six months of fiscal year 2024, primarily driven by a $89.9 million decrease in module sales and a $19.6 million decrease in router sales, partially offset by a $0.6 million increase in managed connectivity sales.

Gross Profit

The following table summarizes our gross profit and gross margin by reportable segment:

(in thousands, except percentages)

In the first six months of fiscal year 2025, gross profit increased $1.4 million to $205.1 million from $203.7 million in the first six months of fiscal year 2024. This increase was primarily driven by a $19.4 million increase from Signal Integrity, which experienced higher sales led by 10G PON and data center due to stronger demand, offset by pricing pressures, a $16.9 million decrease in the amortization of acquired technology intangible assets related to the Sierra Wireless Acquisition due to impairments in the fourth quarter of fiscal year 2024, a $6.5 million increase from Analog Mixed Signal and Wireless, which experienced higher sales due to stronger demand, particularly with TVS consumer products, a $3.3 million decrease for amortization of inventory step-up due to the finalization of measurement period adjustments in the second quarter of fiscal year 2024 related to the Sierra Wireless Acquisition, and a $2.7 million decrease for transaction and integration costs related to the Sierra Wireless Acquisition, partially offset by a $47.0 million decrease from IoT Systems and Connectivity due to lower module and router sales primarily driven by soft demand causing decreased sales volume and pricing pressures.

Our gross margin was 48.7% in the first six months of fiscal year 2025, compared to 42.9% in the first six months of fiscal year 2024. Gross margin from Signal Integrity was 60.8% in the first six months of fiscal year 2025, compared to 59.9% in the first six months of fiscal year 2024, primarily due to higher volume reducing overhead. Gross margin from Analog Mixed Signal and Wireless was 55.7% in the first six months of fiscal year 2025, compared to 61.4% in the first six months of fiscal year 2024, primarily due to unfavorable product mix, partially offset by higher overhead absorption. Gross margin from IoT Systems and Connectivity was 36.4% in the first six months of fiscal year 2025, compared to 39.2% in the first six months of fiscal year 2024, primarily driven by softer demand in market and pricing pressures.

Operating Expenses, net

(in thousands, except percentages)

Selling, General and Administrative Expenses

SG&A expenses decreased $9.3 million in the first six months of fiscal year 2025 compared to the first six months of fiscal year 2024 primarily as a result of an $11.0 million decrease in transaction and integration expenses primarily related to the Sierra Wireless Acquisition, a $1.4 million reduction in travel expenses, and a $0.5 million net decrease in staffing-related costs, which reflects lower headcount due to recent restructuring offset by an increase in share-based and other supplemental compensation, partially offset by a $3.4 million increase in depreciation.

Product Development and Engineering Expenses

Product development and engineering expenses decreased $16.3 million in the first six months of fiscal year 2025 compared to the first six months of fiscal year 2024 primarily as a result of an $11.1 million net decrease in staffing-related costs due to lower headcount, a decrease of $3.8 million from new product introduction expenses, a $1.7 million decrease in facilities expenses, and a $1.6 million decrease in transaction and integration expenses primarily related to the Sierra Wireless Acquisition, partially offset by a $1.6 million decrease in tax credits and a $0.4 million increase in depreciation.

Intangible Amortization

Intangible amortization decreased by $9.2 million for the first six months of fiscal year 2025 compared to the same period in fiscal year 2024 due to impairment of intangible assets acquired in the Sierra Wireless Acquisition related to customer relationships and trade name in the fourth quarter of fiscal year 2024. The amortization of acquired technology intangible assets is reflected in cost of sales.

Restructuring

Restructuring decreased by $7.2 million for the first six months of fiscal year 2025 compared to the same period in fiscal year 2024 primarily due to structural reorganization actions primarily in the prior year period to reduce our workforce as a result of cost-saving measures and internal resource alignment including from the realization of synergies of the Sierra Wireless Acquisition.

Goodwill Impairment

There was no goodwill impairment for the first six months of fiscal year 2025 compared to $279.6 million of goodwill impairment for the same period in fiscal year 2024 due to valuation adjustments of goodwill related to the Sierra Wireless Acquisition. See Note 8, Goodwill and Intangible Assets, to our interim unaudited condensed consolidated financial statements for additional information.

Interest Expense

Interest expense, including amortization and write-off of deferred financing costs, was $51.8 million and $44.7 million for the first six months of fiscal years 2025 and 2024, respectively. The increase was primarily due to a $5.5 million write-off of deferred financing costs as a result of approximately $188.1 million of 2028 Notes extinguished in exchange for common stock in the second quarter of fiscal year 2025.

Loss on Extinguishment of Debt

In addition to the write-off of $5.5 million of deferred financing costs as a result of approximately $188.1 million of 2028 Notes extinguished in exchange for common stock in the first six months of fiscal year 2025, which was recorded in "Interest expense" in the Statements of Operations, we recognized a loss on extinguishment of debt equal to the difference between the fair value of our common stock delivered to certain holders of the 2028 Notes and the carrying value of the outstanding debt, accrued interest and third-party fees related to the Exchange Agreements. In the first six months of fiscal year 2025, in connection with the exchange transactions, we recognized $144.7 million of loss included in "Loss on extinguishment of debt" in the Statements of Operations.

Investment Impairments and Credit Loss Reserves, Net

During the first six months of fiscal year 2025, investment impairments and credit loss reserves, net totaled a loss of $1.1 million due to an other-than-temporary impairment on one of our non-marketable equity investments. During the first six months of 2024, investment impairments and credit loss reserves, net totaled a loss of $0.3 million due to adjustments to our credit loss reserve for our available-for-sale debt securities.

Provision for Income Taxes

In the first six months of fiscal year 2025, we recorded income tax expense of $7.2 million, compared to income tax expense of $54.2 million in the first six months of fiscal year 2024. The effective tax rates for the first six months of fiscal years 2025 and 2024 were provision rates of 3.8% and 15.2%, respectively. The change in our effective tax rate for the first six months of fiscal year 2025 compared to the first six months of fiscal year 2024 was primarily due to a regional mix of income and changes in valuation allowance. The effective tax rates in the first six months of fiscal years 2025 and 2024 differ from the statutory federal income tax rate of 21% primarily due to a regional mix of income, changes in valuation allowance, non-deductibility of goodwill impairment, impact of GILTI, R&D credits and nondeductible loss on extinguishment of debt.

During the second quarter of fiscal year 2024, we recorded a valuation allowance against our U.S. deferred tax assets of approximately $52.8 million. We are required to assess whether a valuation allowance should be recorded against our DTAs based on the consideration of all available evidence, using a "more likely than not" realization standard. The four sources of taxable income that must be considered in determining whether DTAs will be realized are: (1) future reversals of existing taxable temporary differences (i.e. offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the tax law; (3) tax planning strategies; and (4) future taxable income exclusive of reversing temporary differences and carryforwards.

After a review of the four sources of taxable income described above and in view of our three-year cumulative loss, we were not able to conclude that it is more likely than not that our DTAs will be realized. As a result, we recorded an additional valuation allowance on our DTAs, with a corresponding charge to our income tax provision, of approximately $52.8 million during the second quarter of fiscal year 2024.

Liquidity and Capital Resources

Our capital requirements depend on a variety of factors including, but not limited to, the rate of increase or decrease in our existing business base; the success, timing and amount of investment required to bring new products to market; sales growth or decline; potential acquisitions or divestitures; the general economic environment in which we operate; and our ability to generate cash flows from operating activities.

We believe that our cash on hand, cash available from future operations and available borrowing capacity under our Revolving Credit Facility (as defined below) are sufficient to meet liquidity requirements for at least the next 12 months, including funds needed for our material cash requirements. As of July 28, 2024, we had $115.9 million in cash and cash equivalents and $282.2 million of available undrawn borrowing capacity on our Revolving Credit Facility, subject to net leverage limitations and customary conditions precedent, including the accuracy of representations and warranties and the absence of defaults. Over the longer-term, we expect to fund our business using cash flows from operating activities.

As of July 28, 2024, we were in compliance with the financial covenants in the Credit Agreement (as defined below). Based on our current amount of debt outstanding and financial projections, management believes we will maintain compliance with our financial covenants and that our existing cash, projected operating cash flows and available borrowing capacity under the Revolving Credit Facility are adequate to meet our operating needs, liabilities and commitments over the next twelve months from the issuance of the accompanying interim unaudited condensed consolidated financial statements.

As of July 28, 2024 and January 28, 2024, there was $2.9 million outstanding under the letters of credit, swing line loans and alternative currency sub-facilities outstanding under the Revolving Credit Facility.

A meaningful portion of our capital resources, and the liquidity they represent, are held by our subsidiaries outside of the U.S. As of July 28, 2024, our foreign subsidiaries held $102.7 million of cash and cash equivalents, compared to $104.6 million at January 28, 2024. Our liquidity may be impacted by fluctuating exchange rates. For additional information on exchange rates, see Item 3–Quantitative and Qualitative Disclosures About Market Risk.

In connection with the enactment of the Tax Act, all historic and current foreign earnings are taxed in the U.S. Depending on the jurisdiction, these foreign earnings are potentially subject to a withholding tax, if repatriated. As of July 28, 2024, our historical undistributed earnings prior to fiscal year 2023 of our foreign subsidiaries are intended to be permanently reinvested outside of the U.S. With the enactment of the Tax Act, all post-1986 previously unremitted earnings for which no U.S. deferred tax liability had been accrued were subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, we have determined that none of our foreign earnings for fiscal years 2023 and 2024 will be permanently reinvested. If we needed to remit all or a portion of our historical undistributed earnings to the U.S. for investment in our domestic operations, any such remittance could result in increased tax liabilities and a higher effective tax rate. Determination of the amount of the unrecognized potential deferred tax liability on these unremitted earnings is not practicable.

We expect our future non-operating uses of cash will be for capital expenditures and debt repayment. We expect to fund these cash requirements through cash flows from operating activities.

Credit Agreement

On September 26, 2022 (the "Third Restatement Effective Date"), we entered into a third amended and restated credit agreement (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, swing line lender and letter of credit issuer.

As of July 28, 2024, the borrowing capacity on the revolving credit facility under the Credit Agreement (the "Revolving Credit Facility") is $500.0 million, of which $162.5 million is scheduled to mature on November 7, 2024 and $337.5 million is scheduled to mature on January 12, 2028 (subject to, in certain circumstances, an earlier springing maturity), and the term loans thereunder (the "Term Loans") are scheduled to mature on January 12, 2028 (subject to, in certain circumstances, an earlier springing maturity).

As of July 28, 2024, we had $622.6 million outstanding under the Term Loans and $215.0 million outstanding under the Revolving Credit Facility, which had available undrawn borrowing capacity of $282.2 million, subject to net leverage limitations and customary conditions precedent, including the accuracy of representations and warranties and the absence of defaults.

Up to $40.0 million of the Revolving Credit Facility may be used to obtain letters of credit, up to $25.0 million of the Revolving Credit Facility may be used to obtain swing line loans, and up to $75.0 million of the Revolving Credit Facility may be used to obtain revolving loans and letters of credit in certain currencies other than U.S. Dollars. The proceeds of the Revolving Credit Facility may be used by us for capital expenditures, permitted acquisitions, permitted dividends, working capital and general corporate purposes.

As of July 28, 2024, we were in compliance with the financial covenants in our Credit Agreement. The Credit Agreement also contains customary provisions pertaining to events of default. If any event of default occurs, the obligations under the Credit Agreement may be declared due and payable, terminated upon written notice to us and existing letters of credit may be required to be cash collateralized.

See Note 9, Long-Term Debt to our interim unaudited condensed consolidated financial statements for additional information regarding the terms of the Credit Agreement.

We have entered into interest rate swap agreements to hedge the variability of interest payments on debt outstanding under the Term Loans. See Note 17, Derivatives and Hedging Activities, to our interim unaudited condensed consolidated financial statements for additional information.

Convertible Senior Notes Due 2027

On October 6, 2022 and October 21, 2022, we issued and sold $300.0 million and $19.5 million, respectively, in aggregate principal amount of 1.625% Convertible Senior Notes due 2027 (the "2027 Notes") in a private placement. The 2027 Notes were issued pursuant to an indenture dated October 12, 2022, by and among us, the subsidiary guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee. The 2027 Notes bear interest at a rate of 1.625% per year, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on May 1, 2023. The 2027 Notes will mature on November 1, 2027, unless earlier converted, redeemed or repurchased. The 2027 Notes are not currently redeemable and, as of April 28, 2024, none of the conditions allowing holders of the 2027 Notes to convert had been met. The 2027 Notes were initially issued pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act.

We used approximately $72.6 million of the net proceeds from the 2027 Notes to pay for the cost of the Convertible Note Hedge Transactions, after such cost was partially offset by approximately $42.9 million of proceeds to us from the sale of Warrants in connection with the issuance of the 2027 Notes, all as defined and described in Note 9, Long-Term Debt to our interim unaudited condensed consolidated financial statements. The Convertible Note Hedge Transactions and Warrants transactions are indexed to, and potentially settled in, our common stock and the net cost of $29.7 million has been recorded as a reduction to additional paid-in capital in the consolidated statement of stockholders’ equity (deficit). We used the remaining net proceeds to fund a portion of the consideration in the Sierra Wireless Acquisition and to pay related fees and expenses. For additional information on the 2027 Notes, Convertible Note Hedge Transactions and the Warrants, see Note 9, Long-Term Debt to our interim unaudited condensed consolidated financial statements.

Convertible Senior Notes Due 2028

On October 26, 2023, we issued and sold $250.0 million in aggregate principal amount of 2028 Notes in a private placement. The 2028 Notes were issued pursuant to an indenture, dated October 26, 2023, by and among the Company, the subsidiary guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee. The 2028 Notes bear interest at a rate of 4.00% per year, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on May 1, 2024. The 2028 Notes will mature on November 1, 2028, unless earlier converted, redeemed or repurchased. As of July 28, 2024, approximately $62.0 million of the 2028 Notes remained outstanding. The 2028 Notes were offered and sold only to eligible purchasers who are both "qualified institutional buyers" within the meaning of Rule 144A under the Securities Act and "accredited investors" within the meaning of Rule 501(a) under the Securities Act, in reliance on Section 4(a)(2) under the Securities Act.

The 2028 Notes are not currently redeemable. The 2028 Notes may be converted at the option of the holders at the times and under the circumstances and at the conversion rate described in Note 9, Long-Term Debt, to our interim unaudited condensed consolidated financial statements. As of July 28, 2024, one of the conditions allowing holders of the 2028 Notes to convert had been met. The trading price of our common stock remained above 130% of the applicable $20.37 conversion price for at least 20 trading days during the 30 consecutive trading-day period ending on, and including, July 26, 2024 (the last trading day of the quarter ended July 28, 2024), holders of the 2028 Notes would have the right to convert their 2028 Notes beginning July 29, 2024 through October 25, 2024 (the last trading day of the quarter ending October 27, 2024). If converted, we will settle in cash the aggregate principal amount of the 2028 Notes to be converted, and for the remainder of the conversion obligations in excess of the aggregate principal amount of the notes being converted, we will settle the obligations in either cash, shares of our common stock, or any combination thereof, at our option.

On July 11, 2024 and July 15, 2024, we entered into the Exchange Agreements with certain holders of the 2028 Notes. Pursuant to the Exchange Agreements, certain holders of the 2028 Notes exchanged with us approximately $188.1 million in aggregate principal amount of 2028 Notes held by them for an aggregate of 10,378,431 shares of our common stock, which number of shares was determined over an averaging period that commenced on July 12, 2024. We accounted for these exchange transactions as a partial debt extinguishment and recognized a loss on extinguishment of debt equal to the difference between the fair value of our common stock delivered to certain holders of the 2028 Notes and the carrying value of the outstanding debt, accrued interest and third-party fees related to the Exchange Agreements. In the three and six months ended July 28, 2024, in connection with the exchange transactions, we recognized $144.7 million of loss included in "Loss on extinguishment of debt" in the Statements of Operations and $5.5 million of loss resulting from the write-off of deferred financing costs included in "Interest expense" in the Statements of Operations.

For additional information on the 2028 Notes, see Note 9, Long-Term Debt to our interim unaudited condensed consolidated financial statements.

Capital Expenditures and Research and Development

We incur significant expenditures in order to fund the development, design and manufacture of new products. We intend to continue to focus on those areas that have shown potential for viable and profitable market opportunities, which may require additional investment in equipment and the hiring of additional design and application engineers aimed at developing new products. Certain of these expenditures, particularly the addition of design engineers, do not generate significant payback in the short-term. We plan to finance these expenditures with cash generated by our operating activities, our existing cash balances and additional draws on our Revolving Credit Facility, as needed. Borrowings under our Revolving Credit Facility are subject to customary conditions precedent, including the accuracy of representations and warranties and the absence of any defaults under the facility.

Purchases under our Stock Repurchase Program

We currently have in effect a stock repurchase program that was initially approved by our Board of Directors in March 2008. On March 11, 2021, the Board of Directors approved the expansion of the stock repurchase program by an additional $350.0 million. This program represents one of our principal efforts to return value to our stockholders. Under the program, subject to the terms of the Credit Agreement, we may repurchase our common stock at any time or from time to time, without prior notice, subject to market conditions and other considerations. Our repurchases may be made through Rule 10b5-1 and/or Rule 10b-18 or other trading plans, open market purchases, privately negotiated transactions, block purchases or other transactions.

We did not repurchase any shares of our common stock under the program in the first six months of fiscal year 2025 or in the first six months of fiscal year 2024. As of July 28, 2024, the remaining authorization under the program was $209.4 million. To the extent we repurchase any shares of our common stock under the program in the future, we expect to fund such repurchases from cash on hand and borrowings on our Revolving Credit Facility. We have no obligation to repurchase any shares under the program and may suspend or discontinue it at any time.

Working Capital

Working capital, defined as total current assets less total current liabilities including the current portion of long-term debt, fluctuates depending on end-market demand and our effective management of certain items such as receivables, inventory and payables. In times of escalating demand, our working capital requirements may increase as we purchase additional manufacturing materials and increase production. In addition, our working capital may be affected by potential acquisitions and transactions involving our debt instruments. Although investments made to fund working capital will reduce our cash balances, these investments are necessary to support business and operating initiatives.

There have been no material changes to our cash requirements from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2024.

Cash Flows

In summary, our cash flows for each period were as follows:

(in thousands)

Operating Activities

Net cash provided by or used in operating activities is driven by net income or loss adjusted for non-cash items and fluctuations in operating assets and liabilities.

Operating cash flows for the first six months of fiscal year 2025 compared to the first six months of fiscal year 2024 were favorably impacted by a significant decrease in annual bonus payments, lower payroll costs related to reduced headcount, a decrease in income tax payments, and lower transaction and integration costs primarily related to the Sierra Wireless Acquisition, and were unfavorably impacted by an 11.3% decrease in net sales, higher restructuring payments related to one-time employee termination benefits and an incremental increase in inventory spend.

Investing Activities

Net cash provided by or used in investing activities is primarily driven by capital expenditures, purchases and sales of investments, purchases of intangibles, and proceeds from corporate-owned life insurance.

Capital expenditures were $4.7 million for the first six months of fiscal year 2025, which were lower due to cost-saving initiatives, compared to $20.9 million for the first six months of fiscal year 2024 as we made investments to update and expand our production capabilities.

In the first six months of fiscal year 2025, we sold investments for proceeds of $2.7 million. In the first six months of fiscal year 2025, we paid $0.4 million for strategic investments, including investments in companies that are enabling the LoRa® and LoRaWAN® -based ecosystem, compared to $0.9 million for the first six months of fiscal year 2024.

Purchases of intangibles were $5.0 million for the first six months of fiscal year 2025, which included capitalized development costs and software licenses.

In the first six months of fiscal year 2025 and 2024, we received $4.8 million and $2.5 million of proceeds, respectively, from corporate-owned life insurance, which were used to pay deferred compensation distributions.

Financing Activities

Net cash provided by or used in financing activities is primarily attributable to proceeds or payments on our Revolving Credit Facility, payments related to deferred financing costs, payments related to employee share-based compensation payroll taxes and proceeds from the exercise of stock options.

In the first six months of fiscal year 2025, we did not borrow or make payments on our Revolving Credit Facility. In the first six months of fiscal year 2024, we borrowed $60.0 million on our Revolving Credit Facility.

In the first six months of fiscal year 2025, we paid $0.8 million for deferred financing costs, compared to $11.7 million for the first six months of fiscal year 2024.

In the first six months of fiscal year 2025, we paid $4.2 million for employee share-based compensation payroll taxes and received proceeds of $0.6 million from the exercise of stock options. In the first six months of fiscal year 2024, we paid $2.4 million for employee share-based compensation payroll taxes. We do not directly control the timing of the exercise of stock options. Such exercises are independent decisions made by grantees and are influenced most directly by the stock price and the expiration dates of stock option awards. Such proceeds are difficult to forecast, resulting from several factors that are outside our control. We believe that such proceeds will remain a nominal source of cash in the future.

Critical Accounting Estimates

Our critical accounting estimates are disclosed in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2024. There have been no significant changes to our policies during the six months ended July 28, 2024.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 1, Organization and Basis of Presentation to our interim unaudited condensed consolidated financial statements.

We are subject to a variety of market risks, including commodity risk and the risks related to foreign currency, interest rates and market performance that are discussed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended January 28, 2024. Many of the factors that can have an impact on our market risk are external to us, and so we are unable to fully predict them.

Commodity Risk

We are subject to risk from fluctuating market prices of certain commodity raw materials, particularly gold, that are incorporated into our end products or used by our suppliers to process our end products. Increased commodity prices are passed on to us in the form of higher prices from our suppliers, either in the form of general price increases or a commodity surcharge. Although we generally deal with our suppliers on a purchase order basis rather than on a long-term contract basis, we generally attempt to obtain firm pricing for volumes consistent with planned production. Our gross margins may decline if we are not able to increase selling prices of our products or obtain manufacturing efficiencies to offset the increased cost. We do not enter into formal hedging arrangements to mitigate against commodity risk.

Foreign Currency Risk

Our foreign operations expose us to the risk of fluctuations in foreign currency exchange rates against our functional currencies and we may economically hedge this risk with foreign currency contracts (such as currency forward contracts). Gains or losses on these balances are generally offset by corresponding losses or gains on the related hedging instruments. As of July 28, 2024, our largest foreign currency exposures were from the Australian Dollar, Canadian Dollar, Euro, Swiss Franc, South Korean Won, and Great British Pound.

We considered the historical trends in foreign currency exchange rates and determined that it is reasonably possible that adverse changes in foreign exchange rates of 10% for all currencies could be experienced in the near-term. These reasonably possible adverse changes were applied to our total monetary assets and liabilities denominated in currencies other than our functional currency as of the end of our second quarter of fiscal year 2025. The adverse impact these changes would have had (after taking into account balance sheet hedges only) on our income before taxes is $5.4 million for the quarter ended July 28, 2024.

Interest rate and credit risk

We are subject to interest rate risk in connection with the portion of the outstanding debt under our Credit Agreement that bears interest at a variable rate as of July 28, 2024.

In the first quarter of fiscal year 2024, we entered into an interest rate swap agreement with a 2.75 year term to hedge the variability of interest payments on $150.0 million of debt outstanding on the Term Loans at a Term SOFR rate of 3.58%, plus a variable margin and spread based on our consolidated leverage ratio.

In the fourth quarter of fiscal year 2023, we entered into an interest rate swap agreement with a 5 year term to hedge the variability of interest payments on $450.0 million of debt outstanding on the Term Loans at a Term SOFR rate of 3.44%, plus a variable margin and spread based on our consolidated leverage ratio.

Based upon our $238.0 million of unhedged floating-rate outstanding indebtedness as of July 28, 2024, the adverse impact a one percentage point increase in Term SOFR would have on our interest expense is $2.4 million.

Interest rates also affect our return on excess cash and investments. As of July 28, 2024, we had $115.9 million of cash and cash equivalents. A majority of our cash and cash equivalents generate interest income based on prevailing interest rates. Interest income, net of reserves, generated by our investments and cash and cash equivalents was $0.4 million in the second quarter of fiscal year 2025. A significant change in interest rates would impact the amount of interest income generated from our cash and investments. It would also impact the market value of our investments.

Our investments are primarily subject to credit risk. Our investment guidelines prescribe credit quality, permissible investments, diversification, and duration restrictions. These restrictions are intended to limit risk by restricting our investments to high quality debt instruments with relatively short-term durations. Our investment strategy limits investment of new funds and maturing securities to U.S. Treasury, Federal agency securities, high quality money market funds and time deposits with our principal commercial banks. Outside of these investment guidelines, we also invest in a limited amount of debt securities in privately held companies that we view as strategic to our business. For example, many of these investments are in companies that are enabling the LoRa®- and LoRaWAN® -based ecosystem.

Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-wide liquidity problems. Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. We maintain cash held in deposit at financial institutions in the U.S. These deposits are insured by the FDIC in an amount up to $250,000 for any depositor. To the extent we hold cash deposits in amounts that exceed the FDIC insurance limitation, we may incur a loss in the event of a failure of any of the financial institutions where we maintain deposits. There can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S. or any applicable foreign government in the future or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a future failure or liquidity crisis. In addition, if any of our partners or parties with whom we conduct business are unable to access funds due to the status of their financial institution, such parties’ ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments to us could be adversely affected. Management believes we are not exposed to significant risk due to the financial position of the depository institution, but will continue to monitor regularly and adjust, if needed, to mitigate risk. We have established guidelines regarding diversification of our investments and their maturities, which are designed to maintain principal and maximize liquidity. To date, we have not experienced any losses associated with this credit risk and continue to believe that this exposure is not significant.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. As a result of the material weaknesses in our internal control over financial reporting described in Item 9A., Controls and Procedures, in our Annual Report on Form 10-K for the fiscal year ended January 28, 2024 filed with the SEC on March 28, 2024, and as outlined below, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of July 28, 2024.

Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

We have identified a deficiency in a principle associated with the risk assessment component of the COSO framework. Specifically, the control deficiency constitutes a material weakness relating to identifying and assessing changes in the business that could impact our system of internal control. Contributing factors relate to the integration of Sierra Wireless, Inc. ("Sierra Wireless"), which the Company acquired on January 12, 2023. The risk assessment material weakness contributed to other material weaknesses within our system of internal control over financial reporting at the control activity level, all of which were associated with the Sierra Wireless business.

• We did not design and maintain effective controls to ensure that all manual journal entries were properly approved prior to being posted to the general ledger system, and certain individuals had the ability to both prepare, review and post manual journal entries to the general ledger.
• We did not design and maintain effective controls to ensure the timely collection and maintenance of documentation necessary to support claimed value added tax ("VAT") withholding exemptions in certain jurisdictions.
• We did not maintain adequate evidence of the review of information used to determine the inventory excess and obsolescence reserves.

In addition, we did not maintain adequate evidence of our review of the operating forecasts used in the preparation of the financial statements.

Remediation Measures

Management is committed to addressing and remediating the aforementioned material weaknesses and believes progress has been made in our remediation efforts.

• We are enhancing our risk assessment process to ensure it is sufficiently robust to identify and analyze significant changes in the business, including the impact of these changes on the identification of risks and the internal control structure.
• We have migrated the Sierra Wireless enterprise resource planning system to existing Semtech financial systems which we expect to remediate the material weakness around manual journal entries because this migration results in the use of existing policies, processes and internal controls for manual journal entry posting at Sierra Wireless going forward.
• We are enhancing our processes and internal controls to ensure the completeness and accuracy of the information used to estimate the excess and obsolete inventory reserve related to Sierra Wireless inventory.
• We have implemented enhanced processes and internal controls to ensure documentation is retained to support proof of delivery for all transactions with value added tax claims.
• We updated our policies and educated our personnel to properly document and maintain evidence of review of operating forecasts and information used in preparation of the financial statements.

As we continue to evaluate and work to remediate the control deficiencies that gave rise to the material weaknesses, we may determine that additional measures are required to address the control deficiencies, or that we need to modify or otherwise adjust the remediation measures described above. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluation of our internal control over financial reporting. Further, while certain remediation measures are currently in place, the identified material weaknesses will not be considered remediated until the remediation measures have been fully designed and implemented, the applicable controls operate for a sufficient period of time, and we have concluded through testing that the newly implemented controls are operating effectively.

Changes in Internal Controls

Other than the remediation measures described above, there were no changes to our internal control over financial reporting that occurred during the fiscal quarter ended July 28, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Please carefully consider and evaluate all of the information in this Quarterly Report and the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended January 28, 2024. If any of these risks actually occur, our business could be materially harmed. If our business is harmed, the trading price of our common stock could decline.

The risk factors associated with our business have not materially changed as compared to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2024.