Allegro Microsystems, Inc.: Form 10-Q for the period ended Dec 25, 2020

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other information included elsewhere in this Quarterly Report, as well as the audited financial statements and the related notes thereto, and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in our Registration Statement on Form S-1 filed with the SEC on February 2, 2021 (the “Registration Statement”). In addition to historical data, this discussion contains forward-looking statements about our business, results of operations, cash flows, financial condition and prospects based on current expectations that involve risks, uncertainties and assumptions. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section titled “Forward-Looking Statements” and in Part II, Item 1A. “Risk Factors” of this Quarterly Report. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future.

We operate on a 52- or 53-week fiscal year ending on the last Friday of March. Each fiscal quarter has 13 weeks, except in a 53-week year, when the fourth fiscal quarter has 14 weeks. All references to the three- and nine-month periods ended December 25, 2020 and December 27, 2019 relate to the 13- and 26-week periods ended December 25, 2020 and December 27, 2019, respectively. All references to “2020,” “fiscal year 2020” or similar references relate to the 52-week period ended March 27, 2020.

Overview

Allegro MicroSystems, Inc., together with its consolidated subsidiaries (“AMI”, “we”, “us” or “our”) is a leading global designer, developer, manufacturer and marketer of sensor integrated circuits (“ICs”) and application-specific analog power ICs enabling the most important emerging technologies in the automotive and industrial markets. We are the number one supplier of magnetic sensor IC solutions worldwide based on market share, driven by our market leadership in automotive. We focus on providing complete IC solutions to sense, regulate and drive a variety of mechanical systems. This includes sensing angular or linear position of a shaft or actuator, driving an electric motor or actuator, and regulating the power applied to sensing and driving circuits so they operate safely and efficiently.

We are headquartered in Manchester, New Hampshire and have a global footprint with 16 locations across four continents. Our portfolio includes more than 1,000 products, and we ship over one billion units annually to more than 10,000 customers worldwide. During the three- and nine-month periods ended December 25, 2020, we generated $164.4 million and $416.1 million in total net sales, respectively, with $5.1 million in net loss and $9.4 million in net income, and $39.6 million and $98.6 million in Adjusted EBITDA in such fiscal periods, respectively. During the three- and nine-month periods ended December 27, 2019, we generated $159.8 million and $475.5 million in total net sales, respectively, with $9.0 million and $23.8 million in net income and $30.8 million and $89.4 million in Adjusted EBITDA in such fiscal periods, respectively.

On November 2, 2020, we completed our initial public offering (“IPO”) of 28,750,000 shares of our common stock at an offering price of $14.00 per share, of which 25,000,000 shares were sold by us and 3,750,000 shares were sold by selling stockholders, resulting in net proceeds to us of approximately, $321.4 million after deducting $20.1 million of underwriting discounts and $8.5 million of offering costs. Our common stock is now listed on the Nasdaq Global Select Market under the ticker symbol “ALGM.”

Our Growth Strategies and Outlook

We plan to pursue the following strategies to continue to grow our sales and enhance our profitability:

• Invest in research and development that is market-aligned and focused on targeted portfolio expansion. We believe that our investments in research and development in the areas of product design, automotive-grade wafer fabrication technology and IC packaging development are critical to maintaining our competitive advantage. In both the automotive and industrial markets, major technology shifts driven by disruptive technologies are creating high-growth opportunities in areas such as xEVs, advanced driving assistance systems (“ADAS”), Industry 4.0, data centers and green energy applications. Our knowledge of customers’ end systems has driven an expansion of our sensor IC and power solutions to enable these new technologies. By aligning our research and development investments with disruptive technology trends while undergoing a rigorous ROI review, we believe we can deliver an attractive combination of growth and profitability.
• Emphasize the automotive “first” philosophy to align our product development with the most rigorous applications and safety standards. We have been intentional about incorporating support for the stringent automotive operating voltages, temperature ranges and safety and reliability standards into every part of our operations, from design to manufacturing. We believe our focus on meeting or exceeding industry standards as the baseline for product development increases our opportunity in the automotive market as customers look for trusted suppliers to deliver highly reliable solutions for rapidly growing emerging markets, and that our philosophy of designing for automotive safety and reliability gives us a meaningful lead over new entrants attempting to enter the automotive market. For example, we will apply this philosophy of innovation, quality and reliability to our new photonics portfolio which supplies components into safety-critical Light Detection and Ranging (“LiDAR”) applications. We also believe we can use our expertise in designing for the automotive market and our expanding product portfolio to capitalize on increasing demand among industrial customers for ruggedized solutions that meet the highest quality and reliability standards. Additionally, in our experience, demand for solutions that meet or exceed stringent safety and reliability specifications supports higher average selling prices (“ASPs”) and lower ASP declines over time than are typical for our industry.
• Invest to lead in chosen markets and apply our intellectual property and technology to pursue adjacent growth markets. We intend to continue to invest in technology advancements and our intellectual property portfolio to maintain the number one market share position in magnetic sensor ICs and achieve leadership positions in power ICs within our target markets. We believe that leveraging our technology and existing research and development, sales and support efforts will enable us to take advantage of synergistic opportunities in new, adjacent growth markets. We believe this strategy of leveraging our known capabilities to target adjacent growth markets will enable us to enjoy greater returns on our research and development investments.
• Expand our sales channels and enhance our sales operations and customer relationships. Our global sales infrastructure is optimized to support customers through a combination of key account managers and regional technical and support centers near customer locations that enable us to act as an extension of our customers’ design teams, providing us with key insights into product requirements and accelerating the adoption and ramp up of our products in customer designs. We intend to continue strengthening our relationships with our existing customers while also enabling our channel partners to support demand creation and fulfillment for smaller broad-based industrial customers. We believe we will be able to further penetrate the industrial market and efficiently scale our business to accelerate growth by enabling our channel partners to become an extension of our demand generation and customer support efforts.
• Continue to improve our gross margins through product innovation and cost optimization. We strive to improve our profitability by both rapidly introducing new products with value-added features and reducing our manufacturing costs through our fabless, asset-lite manufacturing model. We expect to continue to improve our product mix by developing new products for growth markets where we believe we can generate higher ASPs and/or higher gross margins. We also intend to further our relationships with key foundry suppliers to apply our product and applications knowledge to develop differentiated and cost-efficient wafer processes and packages. We believe we can reduce our manufacturing costs by leveraging the advanced manufacturing capabilities of our strategic suppliers, implementing more cost-effective packaging technologies and leveraging both internal and external assembly and test capacity to reduce our capital requirements, lower our operating costs, enhance reliability of supply and support our continued growth.
• Pursue selective acquisitions and other strategic transactions. We evaluate and pursue selective acquisitions and other transactions to facilitate our entrance into new applications, add to our intellectual property portfolio and design resources, and accelerate our growth. From time to time, we acquire companies, technologies or assets and participate in joint ventures when we believe they will cost effectively and rapidly improve our

product development or manufacturing capabilities or complement our existing product offerings. For example, our August 2020 acquisition of Voxtel, Inc. and its affiliate LadarSystems, Inc. brings together Voxtel’s laser and imaging expertise and our automotive leadership and scale to enable what we believe will be the next generation of ADAS.

• Maintain commitment to sustainability. We intend to continue to innovate with purpose, addressing critical global challenges related to energy efficiency, vehicle emissions and clean and renewable energy with our sensing and power management product portfolio. In addition, we strive to operate our business in a socially responsible and environmentally sustainable manner, and we strive to maintain a commitment to social responsibility in our supply chain and disclosure of the environmental impact of our business operations.

Recent Initiatives to Improve Results of Operations

We have recently implemented several initiatives designed to improve our operating results.

On August 28, 2020, we acquired Voxtel, Inc., a privately-held technology company located in Beaverton, Oregon that specializes in components for eye-safe LiDAR used in ADAS, fully autonomous vehicles, and industrial automation. The total preliminary purchase price of the acquisition was $35.1 million, including certain earnouts that have a potential payout of $15.0 million. The fair value of these earn-outs at acquisition date was $7.8 million. In addition to the laser technology, Voxtel’s capabilities include its Indium Gallium Arsenide (“InGaAs”) Avalanche Photodiode (“APDs”) and APD photoreceivers—highly sensitive in the important eye-safe region around 1550 nanometers (“nm”). This technology enables images to be obtained over a wide range of weather conditions and over a long-distance or a wide field of view using a laser that does not pose an ocular hazard. The combination of these highly sensitive detectors and high-peak-power eye-safe lasers with Voxtel’s custom integrated circuits and electro-optical packaging expertise, allows for cost-effective, compact laser-ranging and 3D-image sensing. In addition, Voxtel holds more than 38 US patents, representing a comprehensive Laser Detection and Ranging (“LADAR”)/LiDAR photonic technology suite.

Through the end of fiscal year 2020, we held a 100% ownership interest in Polar Semiconductor, LLC (“PSL”), a semiconductor wafer fabricator engaged in the manufacturing and testing of foundry wafers. Prior to the divestiture transaction of PSL, foundry revenue accounted for 10.4% and 10.4% of our net sales and supplied 45.8% and 47.7% of our wafer requirements in the three- and nine-month periods ended December 27, 2019, respectively. In addition, through end of fiscal year 2020, we acted as a distributor of Sanken products in North America, South America and Europe on a low-margin, buy-resale basis pursuant to the Sanken Products Distribution Agreement between AML, our wholly owned subsidiary, and Sanken. Our net sales from the distribution of Sanken products in the three- and nine-month periods ended December 27, 2019 were $7.7 million and $26.7 million, respectively. On March 28, 2020, in order to further our strategy for developing a flexible and efficient manufacturing model that minimizes capital requirements, lowers operating costs, enhances reliability of supply and supports our growth going forward:

• We divested a majority of our ownership interest in PSL to Sanken in (the “PSL Divestiture”), in connection with which:
• Our equity interests in PSL were recapitalized (the “Recapitalization”) in exchange for (i) the contribution by us to PSL of $15.0 million of intercompany debt, representing a portion of the aggregate principal amount of debt owed by PSL to us under certain intercompany loan agreements (the “Existing Allegro Loans”), (ii) the assumption by us of $42.7 million in aggregate principal amount of debt owed by PSL to Sanken under certain intercompany loan and line of credit agreements (the “PSL-Sanken Loans”), that was subsequently forgiven in exchange for our transfer to Sanken of 70% of the issued and outstanding equity interests in PSL, and (iii) the termination of the Existing Allegro Loans and the issuance, pursuant to a consolidated and restructured loan agreement (the “Consolidated Loan Agreement”), of a note payable to us in an aggregate principal amount of $51.4 million (representing the aggregate principal amount of debt outstanding under the Existing Allegro Loans prior to their termination); and
• In exchange for the extinguishment of all outstanding indebtedness owed by us to Sanken under the PSL-Sanken Loans, we (i) divested 70% of the issued and outstanding equity interests in PSL to Sanken, as a

result of which Sanken holds a 70% majority share in PSL and we hold a 30% interest, and (ii) amended and restated the existing limited liability company agreement of PSL to admit Sanken as a member, reflect the Recapitalization and otherwise reflect the rights and obligations of us and Sanken thereunder;

• AML entered into a letter agreement with Sanken providing for, among other things, the termination of AML’s services under the Sanken Products Distribution Agreement, and Sanken and PSL entered into a new distribution agreement providing for PSL to serve as a distributor of Sanken products in North America, South America and Europe; and
• We entered into certain other agreements and transactions with Sanken and PSL as more fully described under “Prospectus Summary—The Divestiture Transactions” in the Registration Statement and elsewhere in this Quarterly Report.

As a result of the PSL Divestiture and the transfer of the Sanken products distribution business to PSL, we expect continued material improvement over this fiscal year in gross profit, operating income and net income, as well as reduced capital expenditures and increased net cash provided by operating activities. Strategically, we believe these changes better enable us to focus solely on our core business in sensor and power applications for the automotive and industrial end markets.

• PSL foundry revenue is no longer consolidated in our results in fiscal year 2021, however, PSL did supply 40.9% and 37.1% of our wafer requirements in the three- and nine-month periods ended December 25, 2020, respectively.
• Net sales from the distribution of Sanken products are also no longer consolidated in our results in fiscal year 2021.

In February 2020, we announced that we would consolidate our assembly and test facilities into a single site, located at our manufacturing facility in the Philippines (the “AMPI Facility”). As such, we have commenced the closure of our manufacturing facility in Thailand (the “AMTC Facility”). We expect to substantially complete this transition by the end of March 2021. We expect to realize a material reduction in cost of goods sold in subsequent periods.

Impact of the COVID-19 Pandemic

On March 11, 2020, the COVID-19 outbreak was declared a pandemic by the World Health Organization. The pandemic has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of the COVID-19 pandemic.

We continue to monitor the rapidly evolving conditions and circumstances as well as guidance from international and domestic authorities, including public health authorities, and we may need to take additional actions based on their recommendations. There is considerable uncertainty regarding the impact on our business stemming from current measures and potential future measures that could restrict access to our facilities, limit manufacturing and support operations and place restrictions on our workforce and suppliers. The measures implemented by various authorities related to the COVID-19 outbreak have caused us to change our business practices including those related to where employees work, the social distance employees are required to keep in our facilities, limitations on in-person meetings with customers, suppliers, service providers and stakeholders, as well as restrictions on business travel to domestic and international locations or to attend trade shows, investor conferences and other events.

The full extent to which the ongoing COVID-19 pandemic adversely affects our financial performance will depend on future developments, many of which are outside of our control, are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the effectiveness of actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions can resume. The COVID-19 pandemic could also result in additional governmental restrictions and regulations, which could adversely affect our business and financial results. In addition, a recession, depression or other sustained adverse market impact resulting from COVID-19 could materially and adversely affect our business and our access to needed capital and liquidity. Even after the COVID-19 pandemic has lessened or subsided, we may continue to experience adverse impacts on our business and financial performance as a result of its global economic impact.

To the extent that the COVID-19 pandemic adversely affects our business, results of operations, financial condition or liquidity, it also may heighten many of the other risks; for example, if the business impacts of COVID-19 continue for an extended period, we may be required to recognize impairments for goodwill and certain long-lived assets including amortizable intangible assets. We have taken actions to mitigate our financial risk given the uncertainty in global markets caused by the COVID-19 pandemic. In March 2020, we borrowed $43.0 million under our credit facilities (including $10.0 million borrowed by PSL under the PSL Revolver, the proceeds of which were retained by PSL and are no longer available for use by us following the consummation of the PSL Divestiture). The borrowing was made as part of our ongoing efforts to preserve financial flexibility considering the current uncertainty in the global markets and related effects on our business resulting from the COVID-19 pandemic.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security Act (“the CARES Act”). The CARES Act contains numerous tax provisions, including a correction to the applicable depreciation rates available in the Tax Cuts and Jobs Act of 2017 (“TCJA”) for Qualified Improvement Property (“QIP”), temporarily establishes a five year carryback period for current net operating losses (“NOL”), and contains a provision for deferred payment of 2020 employer payroll taxes. We currently estimate cash tax benefits of the NOL and QIP changes to be $8,963 and $1,680, respectively. Additionally, we plan to defer payment of $2,766 of payroll taxes, with $1,383 to be paid back in the third quarter of fiscal year 2022 and the remainder in the third quarter of fiscal year 2023. Additional income tax provisions of the Act are currently being evaluated and not expected to have material impacts.

Other Key Factors and Trends Affecting our Operating Results

Our financial condition and results of operations have been, and will continue to be, affected by numerous other factors and trends, including the following:

Design Wins with New and Existing Customers

Our end customers continually develop new products in existing and new application areas, and we work closely with our significant OEM customers in most of our target markets to understand their product roadmaps and strategies. For new products, the time from design initiation and manufacturing until we generate revenue can be lengthy, typically between two and four years. As a result, our future revenue is highly dependent on our continued success at winning design mandates from our customers. Further, because we expect the ASPs of our products to decline over time, we consider design wins to be critical to our future success and anticipate being increasingly dependent on revenue from newer design wins for our newer products. The selection process is typically lengthy and may require us to incur significant design and development expenditures in pursuit of a design win with no assurance that our solutions will be selected. As a result, the loss of any key design win or any significant delay in the ramp-up of volume production of the customer’s products into which our product is designed could adversely affect our business. In addition, volume production is contingent upon the successful market introduction and acceptance of our customer’s end products, which may be affected by several factors beyond our control.

Customer Demand, Orders and Forecasts

Demand for our products is highly dependent on market conditions in the end markets in which our customers operate, which are generally subject to seasonality, cyclicality and competitive conditions. In addition, a substantial portion of our total net sales is derived from sales to customers that purchase large volumes of our products. These customers generally provide periodic forecasts of their requirements, but these forecasts do not commit such customers to minimum purchases, and customers can revise these forecasts without penalty. In addition, as is customary in the semiconductor industry, customers are generally permitted to cancel orders for our products within a specified period. Cancellations of orders could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses. In addition, changes in forecasts or the timing of orders from customers exposes us to the risks of inventory shortages or excess inventory.

Manufacturing Costs and Product Mix

Gross margin, or gross profit as a percentage of total net sales, has been, and will continue to be, affected by a variety of factors, including the ASPs of our products, product mix in a given period, material costs, yields, manufacturing costs and efficiencies. We believe the primary driver of gross margin is the ASP negotiated between us and our customers relative to material costs and yields. Our pricing and margins depend on the volumes and the features of the products we produce and sell to our customers. As our products mature and unit volumes increase, we expect their ASPs to decline. We continually monitor and work to reduce the cost of our products and improve the potential value our solutions provide to our customers as we target new design win opportunities and manage the product life cycles of our existing customer designs. We also maintain a close relationship with our suppliers and subcontractors to improve quality, increase yields and lower manufacturing costs. As a result, these declines often coincide with improvements in manufacturing yields and lower wafer, assembly, and testing costs, which offset some or all of the margin reduction that results from declining ASPs. However, we expect our gross margin to fluctuate on a quarterly basis as a result of changes in ASPs due to product mix, new product introductions, transitions into volume manufacturing and manufacturing costs. Gross margin generally decreases if production volumes are lower as a result of decreased demand, which leads to a reduced absorption of our fixed manufacturing costs. Gross margin generally increases when the opposite occurs.

Cyclical Nature of the Semiconductor Industry

The semiconductor industry is highly cyclical and is characterized by increasingly rapid technological change, product obsolescence, competitive pricing pressures, evolving standards, short product life cycles and fluctuations in product supply and demand. New technology may result in sudden changes in system designs or platform changes that may render some of our products obsolete and require us to devote significant research and development resources to compete effectively. Periods of rapid growth and capacity expansion are occasionally followed by significant market corrections in which sales decline, inventories accumulate and facilities go underutilized. During periods of expansion, our margins generally improve as fixed costs are spread over higher manufacturing volumes and unit sales. In addition, we may build inventory to meet increasing market demand for our products during these times, which serves to absorb fixed costs further and increase our gross margins. During an expansion cycle, we may increase capital spending and hiring to add to our production capacity. During periods of slower growth or industry contractions, our sales, production and productivity suffer and margins generally decline. We are currently in a period in which our manufacturing volumes are below optimal levels, as a result of the impact of COVID-19 on our primary end-market, i.e., automotive.

Components of Our Results of Operations

Net sales

Our total net sales are derived from product sales to direct customers and distributors. We sell products globally through our direct sales force, third party and related party distributors and independent sales representatives. Sales are derived from products for different applications. Our core applications are focused on the automotive, industrial and other industries. Additionally, until the consummation of the PSL Divestiture following the end of fiscal year 2020, we also manufactured products for other applications such as wafer foundry products and acted as a distributor of Sanken products in North America, South America and Europe.

We sell magnetic sensor ICs power ICs and photonics, and prior to the consummation of the PSL Divestiture following the end of fiscal year 2020, we also sold wafer foundry products and acted as a distributor for Sanken products in North America, South America and Europe. Revenue is generally recognized when control of the products is transferred to the customer, which typically occurs upon shipment or delivery, depending on the terms of the contract. When we transact with a distributor, our contractual arrangement is with the distributor and not with the end customer. Whether we transact business with and receive the order from a distributor or directly from an end customer through our direct sales force and independent sales representatives, our revenue recognition policy and resulting pattern of revenue recognition for the order are the same. We recognize revenue net of sales returns, price protection adjustments, stock rotation rights and any other discounts or credits offered to our customers.

Stock-based compensation

In addition to the ratable vesting of our stock-based compensation, upon completion of our IPO we recognized one-time stock-based compensation charges of $40.4 million in connection with the vesting of all outstanding shares of Class A common stock, $1.6 million in connection with the automatic acceleration of 25% of the standard vesting term of shares of Class L common stock and $1.0 million through the LTCIP/TRIP Award RSU Conversion Program (the “RSU Conversion Program”). In the three- and nine-month periods ended December 25, 2020 these one-time stock based compensation charges were allocated to cost of goods sold, research and development expenses and selling, general and administrative expenses in the amounts of $4.4 million, $2.3 million and $36.3 million, respectively.

Cost of goods sold, gross profit and gross margin

Cost of goods sold consists primarily of costs of purchasing raw materials, costs associated with probe, assembly, test and shipping our products, costs of personnel, including stock-based compensation, costs of equipment associated with manufacturing, procurement, planning and management of these processes, costs of depreciation and amortization, costs of logistics and quality assurance, and costs of royalties, value-added taxes, utilities, repairs and maintenance of equipment, and an allocated portion of our occupancy costs. In addition, prior to the PSL Divestiture, costs of goods sold also consisted of finished silicon wafers processed by internal and independent foundries.

Gross profit is calculated as total net sales less cost of goods sold. Gross profit is affected by numerous factors, including average selling price, revenue mix by product, channel and customer, foreign exchange rates, seasonality, manufacturing costs and the effective utilization of our facilities. Another factor impacting gross profit is the time required for the expansion of existing facilities to reach full production capacity. As a result, gross profit varies from period to period and year to year. We expect cost of goods sold to decrease in absolute dollars and as a percentage of total net sales in the future, primarily due to the PSL Divestiture and as a result of the closure of the AMTC Facility and the transfer of the Sanken products distribution business to PSL.

A significant portion of our costs are fixed and, as a result, costs are generally difficult to adjust or may take time to adjust in response to changes in demand. In addition, our fixed costs increase as we expand our capacity. If we expand capacity faster than required by our sales growth, our gross margin could be negatively affected. Gross margin is calculated as gross profit divided by total net sales.

Operating Expenses

Research and development (“R&D”) expenses

R&D expenses consist primarily of personnel-related costs of our research and development organization, including stock-based compensation, costs of development of wafers and masks, license fees for computer-aided design software, costs of development testing and evaluation, costs of developing automated test programs, equipment depreciation and related occupancy and equipment costs. While most of the costs incurred are for new product development, a significant portion of these costs are related to process technology development, and proprietary package development. R&D expenses also include costs for technology development by external parties. We expect further increases in R&D expenses, in absolute dollars and as a percentage of total net sales as we continue the development of innovative technologies and processes for new product offerings as well as increase the headcount of our R&D personnel in future years.

Selling, General and Administrative (“SG&A”) expenses

SG&A expenses consist primarily of personnel-related costs, including stock-based compensation, and sales commissions to independent sales representatives, professional fees, including the costs of accounting, audit, legal, regulatory and tax compliance. Additionally, costs related to advertising, trade shows, corporate marketing, as well as an allocated portion of our occupancy costs also comprise SG&A expenses.

We anticipate our selling and marketing expenses to increase in absolute terms as we expand our sales force and increase our sales and marketing activities. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with being a public company.

In connection with the closing of our IPO during the third fiscal quarter of 2021, we recognized one-time stock-based compensation expense of $40.4 million, consisting of $4.1 million within cost of goods sold, $1.8 million within R&D expenses, and $34.5 million within SG&A expenses, in connection with the vesting of all outstanding shares of our Class A common stock. We also recognized one-time stock-based compensation expense of $1.6 million, consisting of $0.2 million within cost of goods sold, $0.1 million within R&D expenses, and $1.3 million within SG&A expenses, in connection with the automatic acceleration of 25% of the standard vesting term of shares of our Class L common stock at that time. In addition, we recognized one-time stock-based compensation expense of $1.0 million, consisting of $0.1 million within cost of goods sold, $0.4 million within R&D expenses, and $0.5 million within SG&A expenses, in connection with the RSU Conversion Program.

Loss on debt extinguishment

Loss on debt extinguishment represents the loss associated with the partial repayment of our Term Loan Facility on November 25, 2020.

Interest (expense) income, net

Interest (expense) income, net is comprised of interest expense from term loan debt and credit facilities we maintain with various financial institutions and previously on borrowings under the PSL-Sanken Loans (which were forgiven in connection with the PSL Divestiture). Current expense is partially mitigated by income earned on our cash and cash equivalents, consisting primarily of certain investments that have contractual maturities no greater than three months at the time of purchase.

Foreign currency transaction (loss) gain

We incur transaction gains and losses resulting from intercompany transactions as well as transactions with customers or vendors denominated in currencies other than the functional currency of the legal entity in which the transaction is recorded. The largest contributor of the foreign currency transaction (loss) gain is the result of an intercompany loan to our subsidiary that operates the AMTC Facility where at the end of each reporting period we revalue the amounts due under the loan to the U.S. Dollar.

Income in earnings of equity investment

Income in earnings of equity investment represents our equity investment in connection with the PSL Divestiture.

Other, net

Other, net primarily consists of miscellaneous income and expense items unrelated to our core operations.

Income tax (benefit) provision

Our provision for income taxes is comprised of the year to date taxes based on an estimate of the annual effective tax rate plus the tax impact of discrete items.

We are subject to tax in the U.S. and various foreign jurisdictions. Our effective tax rate can fluctuate primarily based on: the mix of our U.S. and foreign income; the impact of discrete transactions; and the difference between the amount of tax benefit generated by the foreign derived intangible income deduction (“FDII”) and research credits offset by the additional tax from the global intangible low-tax income (GILTI) and the base erosion tax (“BEAT”).

We regularly assesses the likelihood of outcomes that could result from the examination of our tax returns by the IRS, and other tax authorities to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our then-current expectations, charges or credits to our provision for income taxes may become necessary. Any such adjustments could have a significant effect on the results of operations.

Results of Operations

Three-Month Period Ended December 25, 2020 Compared to Three-Month Period Ended December 27, 2019

The following table summarizes our results of operations for the three-month periods ended December 25, 2020 and December 27, 2019.

(Dollars in thousands)

(1) Our total net sales for the three-month period ended December 27, 2019 also include related party net sales related to the sale of wafer foundry products to Sanken by PSL and net sales related to our distribution of Sanken products in North America, South America and Europe which, in each case, we did not recognize during the three-month period ended December 25, 2020 and will not recognize in any future period due to our consummation of the Divestiture Transactions. See our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional information regarding our related party net sales for the periods set forth above.

The following table sets forth our results of operations as a percentage of total net sales for the periods presented.

Total net sales

Total net sales increased by $4.6 million, or 2.9%, to $164.4 million in the three-month period ended December 25, 2020 from $159.8 million in the three-month period ended December 27, 2019. This increase was primarily due to automotive production recovery and increased demand in industrial automation applications, partially offset by the removal of wafer foundry products and Sanken distribution products, respectively, resulting from the PSL Divestiture, more fully described below.

Sales Trends by Core End Market and Application

The following table summarizes net sales by core end market and other applications. The categorization of net sales by market is based on the characteristics of the end product and application into which our product will be designed. Other applications include wafer foundry and distribution sales unrelated to and no longer part of our core business in fiscal year 2021.

(Dollars in thousands)

Net sales to our core end markets increased by $28.9 million, or 21.4%, to $164.4 million in the three-month period ended December 25, 2020 from $135.5 million in the three-month period ended December 27, 2019, driven by increases in automotive of $14.8 million, or 15.0%, industrial of $2.3 million, or 10.8%, and other of $11.8 million, or 78.5%.

Automotive net sales increased in the three-month period ended December 25, 2020 compared to the three-month period ended December 27, 2019 as our customers’ vehicle production increased as well as inventory restocking in their supply chains.

Industrial and other net sales improved in the three-month period ended December 25, 2020 compared to the three-month period ended December 27, 2019 due primarily to increased demand in industrial automation applications and data center applications and a COVID-19 related increase in demand for printers and other peripherals.

Sales Trends by Product

The following table summarizes net sales by product:

(Dollars in thousands)

The increase in net sales by product was driven by increases of $17.6 million, or 19.2% in magnetic sensor IC product sales, $10.7 million, or 24.6% in power integrated circuit product sales, and $0.6 million in Photonics sales resulting from the Voxtel acquisition. These increases were partially offset by decreases of $16.6 million and $7.7 million in net sales related to wafer foundry products and Sanken distribution products, respectively, resulting from the PSL Divestiture.

Sales Trends by Geographic Location

The following table summarizes net sales by geographic location based on ship-to location.

(Dollars in thousands)

The increase in net sales across geographic locations in the three-month period ended December 25, 2020 compared to the three-month period ended December 27, 2019 was due primarily to an increase of $10.9 million, or 30.9%, in Greater China related to increases in automotive demand and an increase of $8.6 million, or 110.0%, in Other Asia related to continued strength in data center, other consumer, and printer applications.

Excluding the net sales of $7.7 million associated with the PSL Divestiture, net sales were up $5.0 million, or 20.4%, in the United States and Other Americas, primarily driven by an increase in demand for our core application products sold in the automotive end market. The predominant country comprising Other Americas is Mexico.

The increase in net sales of $3.9 million, or 16.0%, in Europe was primarily driven by increases in automotive demand. The predominant countries comprising Europe are Germany and France.

Revenue in Japan totaled $26.4 million in the three-month period ended December 25, 2020 compared to $29.4 million in the three-month period ended December 27, 2019, excluding net sales of $16.6 million in Japan associated with the PSL Divestiture. This decrease of $2.9 million, or 10.0%, was primarily driven by a decrease in core demand due to COVID-19.

Cost of goods sold, gross profit and gross margin

Cost of goods sold decreased by $8.3 million, or 8.4%, to $90.0 million in the three-month period ended December 25, 2020 from $98.3 million in the three-month period ended December 27, 2019. The decrease in cost of goods sold was primarily due to a $26.6 million decrease in cost of goods sold attributable to the PSL Divestiture. The offsetting $18.4 million increase in cost of goods sold was primarily attributable to increases of $4.7 million in stock-based compensation, of which $4.4 million related to the IPO and accelerated vesting of the Class A and L common stock and RSU Conversion Program, , and a combined $13.4 million of increases attributable to decreased standard margins, returns and quality and other related costs, and manufacturing cost absorptions. In addition, there were $0.3 million of Voxtel related impacts, mostly attributable to acquired intangible amortization during the period.

Gross profit increased by $12.9 million, or 21.0%, to $74.4 million in the three-month period ended December 25, 2020 from $61.5 million in the three-month period ended December 27, 2019. The increase in gross profit was driven by a $28.9 million operational increase in net sales to core end markets, partially offset by $2.3 million related to the PSL Divestiture and by the impacts to cost of goods sold discussed above.

R&D expenses

R&D expenses increased by $5.5 million, or 21.6%, to $31.0 million in the three-month period ended December 25, 2020 from $25.5 million in the three-month period ended December 27, 2019. This increase was primarily due to a $3.0 million increase in stock-based compensation, of which $2.3 million related to the IPO and accelerated vesting of the Class A and L common stock and RSU Conversion Program, and a combined $3.3 million increase in employee salaries and inventory and supplies, partially offset by a reduction of $0.8 million of expenses related to the PSL Divestiture and a $0.5 million reduction in travel and meeting costs.

R&D expenses represented 18.9% of our total net sales for the three-month period ended December 25, 2020, an increase from 15.9% of our total net sales for the three-month period ended December 27, 2019. This percentage increase was primarily due to stock-based compensation expenses recorded in the three-month period ended December 25, 2020.

SG&A expenses

SG&A expenses increased by $42.8 million, or 171.6%, to $67.7 million in the three-month period ended December 25, 2020 from $24.9 million in the three-month period ended December 27, 2019. This increase was primarily due to a $38.0 million increase in stock-based compensation expense, of which $36.3 million related to the IPO and accelerated vesting of the Class A and L common stock and RSU Conversion Program, and a combined $6.6 million of increased employee salaries, insurance and facility costs, partially offset by a reduction of $2.2 million of expenses related to the PSL Divestiture and a combined $2.3 million reduction in severance, professional fees, and travel and meeting costs.

SG&A expenses represented 41.1% of our total net sales for the three-month period ended December 25, 2020, an increase from 15.6% of our total net sales for the three-month period ended December 27, 2019. This percentage increase was primarily due to stock-based compensation expenses recorded in the three-month period ended December 25, 2020.

Loss on debt extinguishment

Loss on debt extinguishment reflected a $9.1 million loss in the three-month period ended December 25, 2020, representing the write-off of unamortized balances of previously deferred financing costs as a result of the $300.0 million Term Loan Facility principal balance repayment on November 25, 2020.

Interest (expense) income, net

Interest expense, net increased by $2.6 million in the three-month period ended December 25, 2020 compared to the three-month period ended December 27, 2019. The increase in interest expense was primarily due to mandatory interest payments on the Term Loan Facility in the three-month period ended December 25, 2020.

Foreign currency transaction (loss) gain

We recorded a foreign currency transaction loss of $0.1 million in the three-month period ended December 25, 2020 compared to a loss of $0.6 million in the three-month period ended December 27, 2019. The foreign currency transaction loss recorded in the three-month period ended December 25, 2020 was primarily due to $0.3 million of realized and unrealized losses from our UK and Philippines locations, partly offset by $0.2 million of realized and unrealized gains from our Thailand location. The currency loss recorded in the three-month period ended December 27, 2019 was primarily attributable to $1.1 million of realized and unrealized losses from our UK location and $0.6 million of realized and unrealized gains from our Thailand location.

Income in earnings of equity investment

Income in earnings of equity investment reflected a $0.9 million gain in the three-month period ended December 25, 2020, representing the earnings on our 30% investment in PSL during the three-month period ended December 25, 2020.

Other, net

Other, net increased by $0.4 million to approximately $0.5 million of loss in the three-month period ended December 25, 2020 from $0.1 million of loss in the three-month period ended December 27, 2019.

Income tax (benefit) provision

The benefit for income taxes and the effective income tax rate were $30.5 million and 85.8%, respectively, in the three-month period ended December 25, 2020 and the provision for income taxes and the effective income tax rate were $1.5 million and 14.7%, respectively, in the three-month period ended December 27, 2019. The change in effective income tax rates is primarily due to the $40.4 million IPO related stock-based compensation charge which significantly reduced U.S.

income and was included in our tax rate from operations in the three-month period ended December 25, 2020. The incremental stock-based compensation windfall was treated as a discrete tax adjustment as an incremental tax deduction in the three-month period ended December 25, 2020.

Additionally, other discrete transactions, the divestiture of Polar and the one-time dividend resulted in additional tax deductions. The reduction in U.S. income and the discrete tax deductions resulted in a U.S. tax NOL that can be carried back to refund prior years’ taxes. In total approximately $18.1 million of discrete tax benefits recorded in the three-month period ended December 25, 2020 were partially offset by a reduction in our FDII deduction and an increase in GILTI and BEAT tax.

Nine-Month Period Ended December 25, 2020 Compared to Nine-Month Period Ended December 27, 2019

The following table summarizes our results of operations for the nine-month periods ended December 25, 2020 and December 27, 2019.

(Dollars in thousands)

(1) Our total net sales for the nine-month period ended December 27, 2019 also include related party net sales related to the sale of wafer foundry products to Sanken by PSL and net sales related to our distribution of Sanken products in North America, South America and Europe which, in each case, we did not recognize during the nine-month period ended December 25, 2020 and will not recognize in any future period due to our consummation of the PSL Divestiture. See our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional information regarding our related party net sales for the periods set forth above.

The following table sets forth our results of operations as a percentage of total net sales for the periods presented.

Total net sales

Total net sales decreased by $59.4 million, or 12.5%, to $416.1 million in the nine-month period ended December 25, 2020 from $475.5 million in the nine-month period ended December 27, 2019. Of this decrease, $76.3 million was attributable to the PSL Divestiture, which was partially offset by increased net sales to our core end markets of $16.9 million, due primarily to increased demand in industrial automation applications and data center applications and a COVID-19-related increase in demand for printers and other peripherals.

Sales Trends by Core End Market and Application

The following table summarizes net sales by core end market and other applications. The categorization of net sales by market is based on the characteristics of the end product and application into which our product will be designed. Other applications include wafer foundry and distribution sales unrelated to and no longer part of our core business in fiscal year 2021.

(Dollars in thousands)

Net sales to our core end markets increased by $16.9 million, or 4.2%, to $416.1 million in the nine-month period ended December 25, 2020 from $399.2 million in the nine-month period ended December 27, 2019, driven by increases in industrial of $9.6 million, or 17.1%, and other of $17.2 million, or 32.3%, and partially offset by a decline in automotive of $9.9 million, or 3.4%.

Automotive net sales decreased in the nine-month period ended December 25, 2020 compared to the nine-month period ended December 27, 2019 as our customers’ vehicle production slowed reflecting factory closures and demand uncertainty related to COVID-19.

Industrial and other net sales improved in the nine-month period ended December 25, 2020 compared to the nine-month period ended December 27, 2019 due primarily to increased demand in industrial automation applications and data center applications and a COVID-19 related increase in demand for printers and other peripherals.

Sales Trends by Product

The following table summarizes net sales by product:

(Dollars in thousands)

The decrease in net sales by product was driven by a decrease of $6.3 million in magnetic sensor IC product sales consistent with the demand weakness in automotive resulting from reductions in vehicle production related to the COVID-19 pandemic and decreases of $49.6 million and $26.7 million in net sales related to wafer foundry products and Sanken distribution products, respectively, as a result of the PSL Divestiture. These decreases were partially offset by an increase of $22.4 million in power IC product sales driven primarily by growth in data center demand, and $0.9 million in Photonics product sales resulting from the Voxtel acquisition during the period.

Sales Trends by Geographic Location

The following table summarizes net sales by geographic location based on ship-to location.

(Dollars in thousands)

The decrease in net sales across geographic locations in the nine-month period ended December 25, 2020 compared to the nine-month period ended December 27, 2019 was due primarily to wafer foundry and distribution sales totaling $76.3 million that were divested and are unrelated to and no longer a part of our core business, partially offset by automotive recovery in Asia and increased data center and other consumer and peripherals revenue growth globally.

Excluding the net sales associated with the PSL Divestiture of $26.7 million, net sales were down $7.3 million, or 9.6%, in the United States and Other Americas, primarily driven by a decrease in demand for our core application products sold in the automotive end market resulting from the factory shutdowns and demand weakness related to the COVID-19 pandemic. The predominant country comprising Other Americas is Mexico.

The decrease in net sales of $6.1 million, or 8.0%, in Europe was primarily driven by a decrease in demand for our core application products sold in the automotive end market. The predominant countries comprising Europe are Germany and France.

Revenue in Asia totaled $277.0 million in the nine-month period ended December 25, 2020 compared to $246.6 million in the nine-month period ended December 27, 2019, excluding the net sales associated with the PSL Divestiture of $49.6 million in Japan. This increase of $30.4 million, or 12.3%, was primarily driven by increases in China and Other Asia for automotive and industrial products, partially offset by a decrease in Japan related to automotive demand weakness.

Cost of goods sold, gross profit and gross margin

Cost of goods sold decreased by $61.8 million, or 21.6%, to $224.2 million in the nine-month period ended December 25, 2020 from $286.0 million in the nine-month period ended December 27, 2019. The decrease in cost of goods sold was primarily due to a $73.2 million decrease in cost of goods sold attributable to the PSL Divestiture. The additional $11.4 million increase in cost of goods sold was primarily attributable to a combined $6.2 million of increases related to standard margins, returns and quality and other costs, and manufacturing cost absorptions, as well as increases of $4.8 million in stock-based compensation, of which $4.4 million related to the IPO and accelerated vesting of the Class A and L common stock and RSU Conversion Program and $0.4 million of Voxtel- related impacts, mostly attributable to acquired intangible amortization occurring during the period.

Gross profit increased by $2.4 million, or 1.3%, to $191.9 million in the nine-month period ended December 25, 2020 from $189.5 million in the nine-month period ended December 27, 2019. The increase in gross profit was driven by a $16.9 million operational increase in net sales to core end markets, and the impacts to cost of goods sold discussed above.

R&D expenses

R&D expenses increased by $2.9 million, or 3.8%, to $80.5 million in the nine-month period ended December 25, 2020 from $77.6 million in the nine-month period ended December 27, 2019. This increase was primarily due to a $3.0 million increase in stock-based compensation expense, of which $2.3 million related to the IPO and accelerated vesting of the Class A and L common stock and RSU Conversion Program, and a combined $4.3 million increase in employee salaries, and inventory and supplies costs, partially offset by a reduction of $2.5 million of expenses related to the PSL Divestiture and a combined $1.8 million reduction in office supplies and travel and meeting costs.

R&D expenses represented 19.3% of our total net sales for the nine-month period ended December 25, 2020, an increase from 16.3% of our total net sales for the nine-month period ended December 27, 2019. This percentage increase was primarily due to stock-based compensation expenses recorded for the nine-month period ended December 25, 2020.

SG&A expenses

SG&A expenses increased by $40.7 million, or 52.1%, to $118.7 million in the nine-month period ended December 25, 2020 from $78.0 million in the nine-month period ended December 27, 2019. This increase was primarily due to $38.2 million increase in stock-based compensation expense, of which $36.3 million related to the IPO and accelerated vesting of the Class A and L common stock and RSU Conversion Program, and a combined $11.4 million increase in employee salaries, professional fees, office supplies, and corporate allocations, partially offset by a reduction of $5.8 million of expenses related to the PSL Divestiture, and a combined reduction of $5.8 million in severance and travel and meeting costs.

SG&A expenses represented 28.5% of our total net sales for the nine-month period ended December 25, 2020, an increase from 16.4% of our total net sales for the nine-month period ended December 27, 2019. This percentage increase was primarily due to stock-based compensation expenses recorded for the nine-month period ended December 25, 2020.

Loss on debt extinguishment

Loss on debt extinguishment reflected a $9.1 million loss in the nine-month period ended December 25, 2020, representing the write-off of unamortized balances of previously deferred financing costs as a result of the $300.0 million Term Loan Facility principal balance repayment on November 25, 2020.

Interest (expense) income, net

Interest expense, net increased by $1.8 million, to interest expense, net of $1.9 million in the nine-month period ended December 25, 2020 from interest expense, net of $0.1 million in the nine-month period ended December 27, 2019. The increase in interest expense was primarily due to mandatory interest payments on the Term Loan Facility in the nine-month period ended December 25, 2020.

Foreign currency transaction (loss) gain

We recorded a foreign currency transaction loss of $1.3 million in the nine-month period ended December 25, 2020 compared to a gain of $2.8 million in the nine-month period ended December 27, 2019. The foreign currency transaction loss recorded in the nine-month period ended December 25, 2020 was primarily due to $2.2 million of realized and unrealized losses from our UK location, partially offset by $1.4 million of realized and unrealized gains from our Thailand location. The foreign currency transaction gain recorded in the nine-month period ended December 27, 2019 was primarily attributable to $2.4 million and $0.4 million of realized and unrealized gains from our Thailand and UK locations, respectively.

Income in earnings of equity investment

Income in earnings of equity investment reflected a $1.4 million gain in the nine-month period ended December 25, 2020, representing the earnings on our 30% investment in PSL during the nine-month period ended December 25, 2020.

Other, net

Other, net decreased by $0.9 million to $0.3 million of loss in the nine-month period ended December 25, 2020 from $1.2 million of loss in the nine-month period ended December 27, 2019. The loss in the nine-month period ended December 27, 2019 was primarily due to expenses incurred associated with a settlement to terminate a relationship with a distributor and disposal of equipment from the prior Worcester, Massachusetts facility that sold during the first three-month period in fiscal year 2020.

Income tax (benefit) provision

The benefit for income taxes and the effective income tax rate were $27.9 million and 150.9%, respectively, in the nine-month period ended December 25, 2020 and the provision for income taxes and the effective income tax rate were $11.7 million and 33.0%, respectively, in the nine-month period ended December 27, 2019. The change in effective income tax rates is primarily due to the $40.4 million IPO related stock-based compensation charge which significantly reduced U.S. income and was included in our tax rate from operations in the nine-month period ended December 25, 2020. The incremental stock-based compensation windfall was treated as a discrete tax adjustment as an incremental tax deduction in the nine-month period ended December 25, 2020.

Additionally, other discrete transactions, the PSL divestiture and the one-time dividend resulted in additional tax deductions. The reduction in U.S. income and the discrete tax deductions resulted in a U.S. tax NOL that can be carried back to refund prior years’ taxes. In total approximately $18.1 million of discrete tax benefits recorded in the nine-month period ended December 25, 2020 were partially offset by a reduction in our FDII deduction and an increase in GILTI and BEAT tax. In the nine-month period ended December 27, 2019, there was a discrete tax expense of approximately $5.5 million recorded for the settlement of IRS transfer pricing audits for years 2016, 2017, and 2018.

Non-GAAP Financial Measures

In addition to the measures presented in our consolidated financial statements, we regularly review other metrics, defined as non-GAAP financial measures by the SEC, to evaluate our business, measure our performance, identify trends, prepare financial forecasts and make strategic decisions. The key metrics we consider are non-GAAP Gross Profit, non-GAAP Gross Margin, non-GAAP Operating Expenses, non-GAAP Operating Income, non-GAAP Operating Margin, non-GAAP Profit before Tax, non-GAAP Provision for Income Tax, non-GAAP Net Income, non-GAAP Net Income per Share, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin (collectively, “Non-GAAP Financial Measures”). These Non-GAAP Financial Measures provide supplemental information regarding our operating performance on a non-GAAP basis that excludes certain gains, losses and charges of a noncash nature or that occur relatively infrequently and/or that management considers to be unrelated to our core operations, and in the case of non-GAAP Provision for Income Tax, management believes that this non-GAAP measure of income taxes provides it with the ability to evaluate the non-GAAP Provision for Income Taxes across different reporting periods on a consistent basis, independent of special items and discrete items, which may vary in size and frequency. By presenting these Non-GAAP Financial Measures, we provide a basis for comparison of our business operations between periods by excluding items that we do not believe are indicative of our core operating performance, and we believe that investors’ understanding of our performance is enhanced by our presenting these Non-GAAP Financial Measures, as they provide a reasonable basis for comparing our ongoing results of operations. Management believes that tracking and presenting these Non-GAAP Financial Measures provides management and the investment community with valuable insight into matters such as our ongoing core operations and the underlying business trends that are affecting our performance. These Non-GAAP Financial Measures are used by both management and our board of directors, together with the comparable GAAP information, in evaluating our current performance and planning our future business activities. We believe that these Non-GAAP Financial Measures, when used in conjunction with our GAAP financial information, also allow investors to better evaluate our financial performance in comparison to other periods and to other companies in our industry.

These Non-GAAP Financial Measures have significant limitations as analytical tools. Some of these limitations are that:

• such measures do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
• such measures exclude certain costs which are important in analyzing our GAAP results;
• such measures do not reflect changes in, or cash requirements for, our working capital needs;
• such measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
• such measures do not reflect our tax expense or the cash requirements to pay our taxes; although depreciation and amortization are noncash charges excluded from our non-GAAP results, the assets being depreciated and amortized will often have to be replaced in the future;
• such measures do not reflect any cash requirements for such replacements; and
• other companies in our industry may calculate such measures differently than we do, thereby further limiting their usefulness as comparative measures.

These Non-GAAP Financial Measures are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. These Non-GAAP Financial Measures should not be considered as substitutes for GAAP financial measures such as gross profit, gross margin, net income or any other performance measures derived in accordance with GAAP. Also, in the future we may incur expenses or charges such as those added back in the calculation of these Non-GAAP Financial Measures. Our presentation of these Non-GAAP Financial Measures should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items.

Our prior disclosure referred to non-GAAP Gross Profit and non-GAAP Gross Margin as Adjusted Gross Profit and Adjusted Gross Margin, respectively. No changes have been made to how we calculate these measures.

Non-GAAP Gross Profit and Non-GAAP Gross Margin

We calculate non-GAAP Gross Profit and non-GAAP Gross Margin excluding the items below from cost of goods sold in applicable periods. We calculate non-GAAP Gross Margin as non-GAAP Gross Profit divided by total net sales.

• PSL and Sanken Distribution Agreement – Represents the elimination of inventory cost amortization and foundry service payment related to one-time costs incurred in connection with the PSL Divestiture.
• Stock-based compensation – Represents noncash expenses arising from the grant of stock awards.
• AMTC Facility consolidation one-time costs – Represents one-time costs incurred in connection with closing of the AMTC Facility and transitioning of test and assembly functions to the AMPI Facility announced and initiated in fiscal year 2020, consisting of moving equipment between facilities, contract terminations and other non-recurring charges. The closure and transition of the AMTC Facility is expected to be substantially complete by the end of March 2021. These costs are in addition to, and not duplicative of, the adjustments noted in note (*) below.
• Amortization of acquisition-related intangible assets – Represents noncash expenses associated with the amortization of intangible assets in connection with the acquisition of Voxtel, Inc., which closed in August 2020.
• COVID-19 related expenses – Represents expenses attributable to the COVID-19 pandemic primarily related to increased purchases of masks, gloves and other protective materials, and overtime premium compensation paid for maintaining 24-hour service at the AMPI Facility.

(*) Non-GAAP Gross Profit and the corresponding calculation of non-GAAP Gross Margin in this release do not include adjustments consisting of:

• Additional AMTC related costs – Represents costs related to the closing of the AMTC Facility and the transitioning of test and assembly functions to the AMPI Facility in the Philippines announced in fiscal year 2020 consisting of: the net savings expected to result from the capacity transition to the AMPI Facility, which facility had duplicative capacity based on the buildouts of the AMPI Facility in fiscal years 2019 and 2018. The elimination of these costs did not reduce our production capacity and therefore did not have direct effects on our ability to generate revenue. The closure and transition of the AMTC Facility is expected to be substantially complete by the end of March 2021.
• Out of period adjustment for depreciation expense of giant magnetoresistance assets (“GMR assets”) – Represents a one-time depreciation expense related to the correction of an immaterial error, related to 2017, for certain manufacturing assets that have reached the end of their useful lives.
• Labor savings – Represents salary and benefit costs related to employees whose positions were eliminated through voluntary separation programs or other reductions in force (not associated with the closure of the AMTC Facility or any other plant or facility) and a restructuring of overhead positions from high-cost to low-cost jurisdictions net of costs for newly hired employees in connection with such restructuring.

Non-GAAP Operating Expenses, non-GAAP Operating Income and non-GAAP Operating Margin

We calculate non-GAAP Operating Expenses and non-GAAP Operating Income excluding the same items excluded above to the extent they are classified as operating expenses, and also excluding the items below in applicable periods. We calculate non-GAAP Operating Margin as non-GAAP Operating Income divided by total net sales.

• Transaction fees – Represents transaction-related legal and consulting fees incurred primarily in connection with (i) the unsuccessful acquisition of a competitor in fiscal year 2019, (ii) the acquisition of Voxtel, Inc. in fiscal year

2020, and (iii) the PSL Divestiture and the transfer of the Sanken products distribution business to PSL in fiscal year 2020.

• Severance – Represents severance costs associated with (i) labor savings initiatives to manage overall compensation expense as a result of the declining sales volume during the applicable period, including a voluntary separation incentive payment plan for employees near retirement and a reduction in force and (ii) the closing of the AMTC Facility and the transitioning of test and assembly functions to the AMPI Facility announced and initiated in fiscal year 2020.

EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin

We calculate EBITDA as net income minus interest income (expense), tax provision, and depreciation and amortization expenses. We calculate Adjusted EBITDA as EBITDA excluding the same items excluded above and also excluding the items below in applicable periods. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by total net sales.

• Non-core (gain) loss on sale of equipment – Represents non-core miscellaneous losses and gains on the sale of equipment.
• Miscellaneous legal judgment charge – Represents a one-time charge associated with the final payment of the previously accrued amount payable with respect to a VAT dispute related to the construction of the AMPI Facility.
• Foreign currency translation loss (gain) – Represents losses and gains resulting from the remeasurement and settlement of intercompany debt and operational transactions, as well as transactions with external customers or vendors denominated in currencies other than the functional currency of the legal entity in which the transaction is recorded.
• Income in earnings of equity investment – Represents our equity method investment in PSL.
• Inventory cost amortization – Represents intercompany inventory transactions incurred from purchases made from PSL in fiscal year 2020. Such costs are one-time incurred expenses impacting our operating results during fiscal year 2021 following the PSL Divestiture. Such costs are not expected to have a continuing impact on our operating results after our second fiscal quarter of fiscal year 2021.
• Foundry service payment – Represents foundry service payments incurred under our Price Support Agreement with PSL in respect to the guaranteed capacity at PSL to support our production forecast and are one-time costs incurred impacting our operating results during fiscal year 2021 following the PSL Divestiture. Such costs are not expected to have a continuing impact on our operating results after fiscal year 2021.

Non-GAAP Profit before Tax

We calculate non-GAAP Profit before Tax as Profit before Tax excluding the same items excluded above and also excluding the items below in applicable periods.

• Loss on debt extinguishment – Represents one-time costs representing deferred financing costs associated with the $300.0 million of our term loan facility repaid during the nine-month period ended December 25, 2020.
• Interest on repaid portion of term loan facility – Represents interest expense associated with the $300.0 million of our term loan facility repaid during the period.

Non-GAAP Provision for Income Tax

In calculating non-GAAP Provision for Income Tax, we have added-back the following to GAAP Provision for Income Taxes:

• Tax effect of adjustments to GAAP results - Represents the estimated income tax effect of the adjustments to non-GAAP Profit Before Tax described above and elimination of discrete tax adjustments.

(Dollars in thousands)

* Non-GAAP Gross Profit and the corresponding calculation of non-GAAP Gross Margin do not include adjustments for the following components of our net income: (i) additional AMTC related costs of $1,198, $2,281, and $— for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, and out of period adjustment for depreciation expense of GMR assets of $—, $768, and $— for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, and (ii) additional AMTC related costs of $6,553 and $— for the nine months ended December 25, 2020 and December 27, 2019, respectively, and out of period adjustment for depreciation expense of GMR assets of $768 and $— for the nine months ended September 25, 2020 and September 27, 2019, respectively.

(Dollars in thousands)

* Non-GAAP Operating Expenses do not include adjustments for the following components of our net income: (i) additional AMTC related costs of $19, $380, and $2,939 for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, and labor savings costs of $109, $—, and $1,072 for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, and (ii) additional AMTC related costs of $723 and $8,603 for the nine months ended December 25, 2020 and December 27, 2019, respectively, and labor savings costs of $218 and $5,884 for the nine months ended December 25, 2020 and December 27, 2019, respectively.

(Dollars in thousands)

* Non-GAAP Operating Income and the corresponding calculation of non-GAAP Operating Margin do not include adjustments for the following components of our net income: (i) additional AMTC related costs of $1,217, $2,661, and $2,939 for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, labor savings costs of $109, $—, and $1,072 for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, and out of period adjustment for depreciation expense of GMR assets of $—, $768, and $— for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, and (ii) additional AMTC related costs of $7,276 and $8,603 for the nine months ended December 25, 2020 and December 27, 2019, respectively, labor savings costs of $218 and $5,884 for the nine months ended December 25, 2020 and December 27, 2019, respectively, and out of period adjustment for depreciation expense of GMR assets of $768 and $— for the nine months ended December 25, 2020 and December 27, 2019, respectively.

(Dollars in thousands)

* Adjusted EBITDA and the corresponding calculation of Adjusted EBITDA Margin do not include adjustments for the following components of our net income: (i) additional AMTC related costs of $1,217, $2,661, and $2,939 for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, and labor savings costs of $109, $—, and $1,072 for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively and (ii) additional AMTC related costs of $7,276 and $8,603 for the nine months ended December 25, 2020 and December 27, 2019, respectively, and labor savings costs of $218 and $5,884 for the nine months ended December 25, 2020 and December 27, 2019, respectively.

(Dollars in thousands)

* Non-GAAP Profit before Tax does not include adjustments for the following components of our net income: (i) additional AMTC related costs of $1,217, $2,661, and $2,939 for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, labor savings costs of $109, $—, and $1,072 for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, and out of period adjustment for depreciation expense of GMR assets of $—, $768, and $— for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, and (ii) additional AMTC related costs of $7,276 and $8,603 for the nine months ended December 25, 2020 and December 27, 2019, respectively, labor savings costs of $218 and $5,884 for the nine months ended December 25, 2020 and December 27, 2019, respectively, and out of period adjustment for depreciation expense of GMR assets of $768 and $— for the nine months ended December 25, 2020 and December 27, 2019, respectively.

(Dollars in thousands)

* Non-GAAP Provision for Income Taxes does not include tax adjustments for the following components of our net income: additional AMTC related costs, labor savings costs, and out of period adjustment for depreciation expense of GMR assets. The related tax effect of those adjustments to GAAP results were $297, $768 and $898 for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, and $1,851 and $3,245 for the nine months ended December 25, 2020 and December 27, 2019, respectively.

(Dollars in thousands)

* Non-GAAP Net Income does not include adjustments for the following components of our net income: (i) additional AMTC related costs of $1,217, $2,661, and $2,939 for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, labor savings costs of $109, $—, and $1,072 for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, and out of period adjustment for depreciation expense of GMR assets of $—, $768, and $— for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, (ii) additional AMTC related costs of $7,276 and $8,603 for the nine months ended December 25, 2020 and December 27, 2019, respectively, labor savings costs of $218 and $5,884 for the nine months ended December 25, 2020 and December 27, 2019, respectively, and out of period adjustment for depreciation expense of GMR assets of $768 and $— for the nine months ended December 25, 2020 and December 27, 2019, respectively, and (iii) the related tax effect of adjustments to GAAP results $297, $768 and $898 for the three months ended December 25, 2020, September 25, 2020, and December 27, 2019, respectively, and $1,851 and $3,245 for the nine months ended December 25, 2020 and December 27, 2019, respectively.

Liquidity and Capital Resources

As of December 25, 2020, we had $157.7 million of cash and cash equivalents and $289.4 million of working capital compared to $214.5 million of cash and cash equivalents and $298.1 million of working capital as of March 27, 2020. Working capital is impacted by the timing and extent of our business needs.

Our primary requirements for liquidity and capital are working capital, capital expenditures, principal and interest payments on our outstanding debt and other general corporate needs. Historically, these cash requirements have been met through cash provided by operating activities and cash and cash equivalents. In March 2020, we borrowed an aggregate of $43.0 million under our revolving credit facilities (including $10.0 million that was borrowed by PSL under its revolving credit facility (the “PSL Revolver”)), representing substantially all of our available capacity, in order to increase our cash position and help maintain financial flexibility in light of the continued uncertainty surrounding the COVID-19 pandemic. Of this $43.0 million, the $10.0 million of debt borrowed under the PSL Revolver is the obligation of PSL and was no longer included on our consolidated balance sheet as of December 25, 2020. In addition, the proceeds from such borrowings were retained by PSL and are no longer available for use by us following the consummation of the PSL Divestiture.

On September 30, 2020, we entered into a term loan credit agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and the other agents, arrangers and lenders party thereto, providing for a $325.0 million senior secured term loan facility. On September 30, 2020, we also entered into a revolving facility credit agreement with Mizuho Bank, Ltd., as administrative agent and collateral agent, and the other agents, arrangers and lenders party thereto, providing for a $50.0 million senior secured revolving credit facility. In connection with entering into the revolving credit facility, we used cash on hand to repay all amounts outstanding under the AML Revolver in the amount of $25.0 million with Mizuho Bank, Ltd. and AML’s $8.0 million line of credit agreement with the Bank of Mitsubishi UFJ, and terminated all commitments thereunder. On November 25, 2020, we repaid $300.0 million of the outstanding $325.0 million Term Loan Facility using proceeds from our recently completed IPO.

We anticipate a significant increase in accounting, legal and professional fees and other costs associated with being a public company. We believe that our existing cash resources, together with the proceeds from our IPO and our access to the capital markets, will be sufficient to finance our continued operations, growth strategy, planned capital expenditures and the additional expenses we expect to incur as a public company for at least the next 12 months. If these resources are not sufficient to satisfy our liquidity requirements, we may be required to seek additional financing. If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, may contain covenants that significantly restrict our operations or our ability to obtain additional debt financing in the future. Any additional financing that we raise may contain terms that are not favorable to us or our stockholders. We cannot assure you that we would be able to obtain additional financing on terms favorable to us or our existing stockholders, or at all.

Cash Flows from Operating, Investing and Financing Activities

The following table summarizes our cash flows for the nine-month periods ended December 25, 2020 and December 27, 2019:

(dollars in thousands)

Operating Activities

Net cash provided by operating activities was $63.5 million in the nine-month period ended December 25, 2020, resulting primarily from our net income of $9.4 million and noncash charges of $79.0 million, partially offset by a net increase in operating assets and decrease in operating liabilities of $24.9 million. Net changes in operating assets and liabilities consisted of a $29.7 million increase in prepaid expenses, a $6.0 million increase in trade accounts receivable, net and a $1.2 million decrease in accrued expenses and other current and long-term liabilities, partially offset by a $8.3 million decrease in net amounts due from related parties, a $2.4 million increase in trade accounts payable, a $1.1 million decrease in inventories and a $0.1 million decrease in accounts receivable – other. The increase in prepaid expenses and other assets, excluding the impact of the noncash removal of PSL-related assets of $5.2 million and the acquisition of Voxtel, included an $18.7 million increase in prepaid taxes, a $3.6 million increase in VAT receivables, a $3.5 million increase in prepaid insurance and a $2.8 million increase in amortizable patent costs. Changes related to trade accounts receivable, net, accounts receivable – other, and due from/to related parties were primarily due to variations in the timing of such payments in the ordinary course of business. The decrease in accrued expenses and other current and long-term liabilities is the result of a $14.9 million increase in balances from March 27, 2020, adjusted for $26.5 million of noncash increases related to the Voxtel acquisition primarily for deferred and contingent consideration, offset by the $7.6 million impact of the noncash removal of PSL and Sanken distribution related assets. Trade accounts payable were impacted by the noncash removal of PSL-related liabilities of $4.2 million, with the difference due to timing of such payments in the ordinary course of business. The $1.1 million inventory increase is the result of a $33.2 million reduction in balances from March 27, 2020, offset by a $32.3 million impact of the noncash removal of PSL and Sanken distribution business related assets and $3.0 million of noncash inventory provisions, reduced by $3.1 million of inventory added in the acquisition of Voxtel.

Net cash provided by operating activities was $48.8 million in the nine-month period ended December 27, 2019, resulting primarily from our net income of $23.8 million and noncash charges of $52.4 million, partially offset by a net increase in operating assets and decrease in liabilities of $27.4 million. The net changes in operating assets and liabilities consisted of a $21.0 million increase in net amounts due from related parties, a $17.3 million decrease in accrued expenses and other current and long-term liabilities, a $6.2 million increase in prepaid expenses and other assets and a $0.3 million increase in inventories. These decreases to cash were partially offset by a $15.5 million decrease in trade accounts receivable, a $1.1 million increase in trade accounts payable and a $0.7 million decrease in accounts receivable – other. The increase in net amounts due from related parties, trade accounts payable, and the decrease in accounts receivable-other was primarily due to variations in the timing of such payments in the ordinary course of business. The decrease in accrued expenses and other current and long-term liabilities was primarily the result of the payment of $14.5 million in incentive plans and an aggregate net decrease to accrued and other liabilities of $2.8 million, which includes a partial offset of a net increase in certain accrued tax accounts in the amount of $3.7 million primarily related to a fiscal year 2020 IRS settlement for a transfer pricing agreement with PSL. The increase in inventories was a result of reduced sales and was partially offset by a noncash impact of $2.5 million of inventory provisions during the period. The decrease in trade accounts receivable, net was primarily a result of decreased sales year-over-year during the comparable periods and includes $0.8 million of noncash bad debt provisions.

Investing Activities

Net cash used in investing activities primarily consists of purchases and sales of property, plant and equipment, partially offset by proceeds from sales of property, plant and equipment. We expect our multi-year transition from an integrated device manufacturer to our current fabless, asset-lite manufacturing model, including the completion of the PSL Divestiture following the end of fiscal year 2020, will result in a decrease in capital expenditures in the future.

Net cash used in investing activities was $50.4 million in the nine-month period ended December 25, 2020, consisting of $25.9 million of purchases of property, plant and equipment, $8.5 million of cash expended for the acquisition of Voxtel and $16.3 million of cash removed as a result of the PSL Divestiture, partially offset by $0.3 million of proceeds from sales of property, plant and equipment.

Net cash used in investing activities was $31.1 million in the nine-month period ended December 27, 2019, consisting of $35.0 million of purchases of property, plant and equipment, partially offset by $3.9 million of proceeds obtained from the sale of property, plant and equipment. The $3.9 million of proceeds from sales of property, plant and equipment were primarily attributable to the sale of our Worcester, Massachusetts facility (the “Worcester Facility”) in the first quarter of fiscal 2020.

Financing Activities

Net cash used in financing activities was $72.2 million in the nine-month period ended December 25, 2020, consisting of $400.0 million of dividends paid prior to our IPO, $300.0 million for repayment of senior secured debt, $27.7 million of payments for taxes related to net share settlement of equity awards, and $33.0 million for repayment of unsecured credit facilities, partially offset by $315.7 million of borrowing of senior secured debt, net of deferred financing costs, $321.4 million of proceeds from initial public offering, net of underwriting discounts and other offering costs, and a $51.4 million related party note receivable.

Net cash provided by financing activities was $30.0 million in the nine-month period ended December 27, 2019, consisting of a repayment of the $30.0 million short-term loan issued to Sanken in the fourth quarter of fiscal year 2019.

Debt Obligations

As of December 25, 2020, we had $25.0 million in aggregate principal amount of debt outstanding under our Senior Secured Credit Facilities. We entered into the Senior Secured Credit Facilities on September 30, 2020 consisting of a $325.0 million Term Loan Facility due in 2027 and a revolving facility credit agreement providing for a $50.0 million Revolving Credit Facility expiring in 2023. On November 25, 2020 we repaid $300.0 million of the outstanding Term Loan Facility principal balance.

Description of Credit Facilities

Term Loan Facility

The Term Loan Facility bears interest at a rate per year of, at our option, either (i) the Base Rate plus an applicable margin from 2.75% to 3.00% depending on our net leverage ratio, or (ii) the Eurodollar Rate plus an applicable margin from 3.75% to 4.00% depending on our net leverage ratio. The Eurodollar Rate is subject to a floor of 0.50%. At December 25, 2020 all term loan borrowings were designated as Eurodollar loans and bore interest of 4.50%.

We incurred deferred financing costs of $9.4 million in connection with the Term Loan Facility, the total of which was amortized into interest expense or recognized as loss on debt extinguishment as of December 25, 2020.

The Term Loan Facility contains certain covenants that may, among other things and subject to certain exceptions, restrict the ability of us to:

• create, incur, assume or suffer to exist any Lien upon any of its property, assets, or revenue;
• create, incur, or assume indebtedness;
• merge, consolidate or amalgamate with or into any other entity;
• purchase or otherwise acquire all or substantially all of the assets, liabilities or properties of any other entity;
• sell, lease, transfer or otherwise dispose of all or substantially all of its assets or properties;
• enter into transactions with affiliates;
• Pay dividends or make other distributions;
• change the nature of its business activities, its fiscal year, or its governing documents.

Borrowings under the Term Loan Facility are secured by 100% of the stock of our domestic subsidiaries, portions of the stock of certain of our foreign subsidiaries, and substantially all of our and our subsidiaries’ other property and assets, in each case subject to various exceptions.

We may be required to make mandatory prepayments of the Term Loan Facility if we have Excess Cash Flow, as defined in the credit agreement, if we make certain sales of assets outside the ordinary course of business, or if we suffer certain property loss events. We may make optional prepayments from time to time without premium or penalty.

Revolving Credit Facility

The Revolving Credit Facility bears interest at a rate per year of, at our option, the Base Rate plus 1.5%, the Cost of Funds Rate plus 2.5%, or the Eurodollar Rate plus 2.5%. In addition, commencing on the last business day of December 2020, we are required to pay, on a quarterly basis, a non-refundable commitment fee of 0.50% per year on the average daily unused commitments under the Revolving Credit Facility.

We incurred financing costs of $0.3 million in connection with the Revolving Credit Facility, which we classified the related short-term and long-term portions within “Prepaid expenses and other current assets” and “Other assets” on our unaudited consolidated balance sheet, and are amortizing these costs over the term of the facility. The unamortized portion of the deferred financing costs associated with the Revolving Credit Facility was $0.3 million at December 25, 2020.

The Revolving Credit Facility contains certain financial and non-financial covenants, including a maximum net leverage ratio applicable to the Revolving Credit Facility in the event that utilization exceeds 35% of the revolving loan commitment.

Borrowings under the Revolving Credit Facility are secured by 100% of the stock of our domestic subsidiaries, portions of the stock of certain of our foreign subsidiaries, and substantially all of our subsidiaries’ other property and assets, in each case subject to various exceptions.

AML Revolver

On January 22, 2019, AML entered into a revolving credit agreement with Mizuho Bank, Ltd., as lender, that provided for a revolving credit facility with a maximum borrowing capacity of $25.0 million (the “AML Revolver”). On January 22, 2020, AML and the lender amended the AML Revolver to extend the termination date for commitments thereunder from January 22, 2020 to January 22, 2021 (the “Commitment Termination Date”). On September 30, 2020, we repaid the AML Revolver in full and in conjunction, terminated it.

Borrowings under the AML Revolver bore interest at a rate per year equal to, at AML’s option, either (i) LIBOR (defined, with respect to the applicable interest period, as the rate per year determined by the lender for making or maintaining such loan at approximately 11:00 a.m. London time on the day that was two London business days prior to the commencement of the applicable interest period), or (ii) the Cost of Funds Rate (defined, with respect to the applicable interest period, as the rate per year determined by the lender to be its effective cost of funding such loan in dollars during such interest period), plus, in each case, a spread of 0.4%. In addition, AML was required to pay, on a quarterly basis in arrears, a non-refundable commitment fee of 0.2% per year on the average daily unused commitments under the AML Revolver during such quarterly period. AML was also required to pay, on the closing date of the AML Revolver, a non-refundable up-front fee of $25 thousand.

The outstanding principal amount of borrowings under the AML Revolver, together with all accrued and unpaid interest thereon, was due and payable on the first to occur of (i) the last day of the applicable interest period, or (ii) the Commitment Termination Date (or, in each case, such earlier date as such borrowings are accelerated or commitments under the AML Revolver are otherwise terminated in accordance with the terms thereof).

AML was permitted to prepay all or any portion of the borrowings outstanding under the AML Revolver from time to time without premium or penalty, provided that any partial prepayment must have been in an aggregate amount not less than $100,000 or an integral multiple thereof, and all prepayments must have been accompanied by accrued and unpaid interest on the amount being prepaid to the date of such prepayment. Amounts prepaid under the AML Revolver may have been subsequently re-borrowed, provided that such prepayment was not accompanied by a termination of the underlying commitment.

Obligations under the AML Revolver were not secured by collateral. The credit agreement governing the AML Revolver contains certain covenants that, among other things and subject to certain exceptions, restricted the ability of AML to:

• merge, consolidate or amalgamate with or into any other entity;
• purchase or otherwise acquire all or substantially all of the assets, liabilities or properties of any other entity;
• sell, lease, transfer or otherwise dispose of all or substantially all of its assets or properties;
• change the nature of its business activities;
• enter into transactions with affiliates; and
• amend its governing documents.

The credit agreement also contained a financial covenant that required AML to maintain positive consolidated income before income taxes and consolidated net income for each of its fiscal years.

The credit agreement governing the AML Revolver contained certain customary representations and warranties and affirmative covenants. In addition, the lender would have been permitted to accelerate all outstanding borrowings and other obligations, terminate outstanding commitments and exercise other specified remedies upon the occurrence of certain events of default (subject to certain grace periods and exceptions), which included, among other things, payment defaults, breaches of representations and warranties, covenant defaults, cross-accelerations to material debt, certain events of bankruptcy and insolvency, and certain judgments, changes in control and material adverse effects.

AML Line of Credit

AML had a line of credit with the Bank of Mitsubishi UFJ that provided for a maximum borrowing capacity of $8.0 million at an interest rate of 1.9%. On October 1, 2020, we repaid this line of credit in full and in conjunction, terminated it.

AMPI Credit Facilities

On November 26, 2019, AMPI entered into a line of credit agreement with Union Bank of the Philippines, Inc. that provides for a maximum borrowing capacity of 60.0 million Philippine pesos (approximately $1.2 million) at the bank’s prevailing interest rate. The line of credit expires on August 31, 2021.

On November 20, 2019, AMPI entered into a line of credit agreement with BDO Unibank that provides for a maximum borrowing capacity of 75.0 million Philippine pesos (approximately $1.6 million) at the bank’s prevailing interest rate. The line of credit expires on June 30, 2021.

Off-Balance Sheet Arrangements

As of December 25, 2020, we did not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that have had or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Recent Accounting Pronouncements

See Note 2, “Summary of Significant Accounting Policies,” in the unaudited consolidated financial statements included elsewhere in this Quarterly Report for a full description of recent accounting pronouncements, including the respective dates of adoption or expected adoption and effects on our condensed consolidated financial statements contained in Item 1 of this Quarterly Report.

We are exposed to market risk in the ordinary course of business, which consists primarily of interest rates risk associated with our cash and cash equivalents and our debt, foreign currency risk and impact of inflation. We do not engage in speculative trading activities. The following analysis provides additional information regarding these risks.

Interest Rate Risk

Our investments have limited exposure to market risk. At December 25, 2020, we maintained a portfolio of cash and cash equivalents, consisting primarily of money market funds. None of these investments have a maturity date in excess of one year. Certain interest rates are variable and fluctuate with current market conditions. Because of the short-term nature of these instruments, we would not expect a sudden change in market interest rates to have a material impact on our financial condition or results of operations.

We are also exposed to market risk as a result of increases or decreases in the amount of interest expense we must pay on our Term Loan Facility and borrowings on our bank credit facilities. Although our Term Loan Facility and credit facilities have variable rates, as of December 25, 2020, we do not believe that a 10% change in market interest rates would have a material impact on our financial position or results of operations.

Foreign Currency Risk

Due to our international operations, a significant portion of our cost of sales and operating expenses is denominated in currencies other than the U.S. Dollar, principally the Euro, the Philippine Peso and the Thai Baht. As a result, our international operations give rise to transactional market risk associated with exchange rate movements of the U.S. Dollar, the Euro, the Philippine Peso and the Thai Baht. Losses on foreign exchange transactions totaled $0.1 million and $1.3 million for the three- and nine-month periods ended December 25, 2020, respectively. Losses on foreign exchange transactions amounted to $0.6 million for the three-month period ended December 27, 2019, and gains on foreign exchange transactions amounted to $2.8 million for the nine-month period ended December 27, 2019. Management does not attempt to minimize these exposures.

In addition, we are exposed to foreign currency translation risk for those subsidiaries whose functional currency is not the U.S. Dollar as changes in the value of their functional currency relative to the U.S. Dollar can adversely affect the translated amounts of our sales, expenses, net income, assets and liabilities. This can, in turn, affect the reported value and relative growth of sales and net income from one period to the next. In addition, changes in the translated value of assets and liabilities due to changes in functional currency exchange rates relative to the U.S. Dollar result in foreign currency translation adjustments that are a component of other comprehensive income or loss. Foreign currency derivative instruments can be used to hedge exposures and reduce the risks of certain foreign currency transactions; however, these instruments provide only limited protection and can carry significant cost. We have no foreign currency derivative instrument hedges as of December 25, 2020. We will continue to analyze our exposure to currency exchange rate fluctuations and may engage in financial hedging techniques in the future to attempt to minimize the effect of these potential fluctuations. Exchange rate fluctuations may adversely affect our financial results in the future.

Impact of Inflation

Inflationary factors, such as increases in overhead costs or the costs of other core operating resources, may adversely affect our operating results. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we do not believe the effects of inflation, if any, on our historical results of operations and financial condition have been material. We cannot assure that future inflationary or other cost pressures will not have an adverse impact on our results of operations and financial condition in the future.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Senior Vice President, Chief Financial Officer and Treasurer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of December 25, 2020. Based on the evaluation of our disclosure controls and procedures as of December 25, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in the section titled “Risk Factors” of the Registration Statement and described elsewhere in this Quarterly Report, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price. For a discussion of our potential risks and uncertainties, see the risk factors previously disclosed in the section titled “Risk Factors” of our Registration Statement, which risk factor section is incorporated herein by reference.