Allegro Microsystems, Inc.: Form 10-Q for the period ended Sep 29, 2023
Filed with the SEC on Nov 6, 2023 and accepted by EDGAR at Nov 6, 2023, 07:57 ET.
Management's discussion and analysis
As filed, 46,049 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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 Annual Report on Form 10-K for the year ended March 31, 2023, filed with the Securities and Exchange Commission on May 25, 2023 ( the “2023 Annual Report”).
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 I, Item 1A. “Risk Factors” of our 2023 Annual Report and 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 six-month periods ended September 29, 2023 and September 23, 2022 relate to the 13- and 26-week periods ended September 29, 2023 and September 23, 2022, respectively. All references to “2024,” “fiscal year 2024” or similar references relate to the 52-week period ended March 29, 2024. All references to “2023,” “fiscal year 2023” or similar references relate to the 53-week period ended March 31, 2023.
Overview
We are a leading global designer, developer, fabless manufacturer and marketer of sensor integrated circuits (“ICs”) and application-specific analog power ICs enabling the most critical technologies in the automotive and industrial markets. We are a leading supplier of magnetic sensor IC solutions worldwide, based on market share, driven by our market leadership in the automotive market. Our products are foundational to automotive and industrial electronic systems. Our sensor ICs enable our customers to precisely measure motion, speed, position and current, while our power ICs include high-temperature and high-voltage capable motor drivers, power management ICs, light emitting diode driver ICs and isolated gate drivers. We believe that our technology expertise, combined with our deep applications knowledge and strong customer relationships, enable us to develop solutions that provide more value to customers than typical ICs. Compared to a typical IC, our solutions are more integrated, intelligent and sophisticated for complex applications and are easier for customers to use.
We are headquartered in Manchester, New Hampshire and have a global footprint across multiple continents. Our portfolio now includes more than 1,500 products, and we ship over 1.5 billion units annually to more than 10,000 customers worldwide. During the three- and six-month periods ended September 29, 2023, we generated $275.5 million and $553.8 million in total net sales, respectively, with $65.7 million and $126.6 million in net income, respectively. During the three- and six-month periods ended September 23, 2022, we generated $237.7 million and $455.4 million in total net sales, respectively, with $50.6 million and $60.9 million in net income, respectively.
Business Updates
On August 7, 2023, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company (for purposes of Section 5.15 and applicable provisions of Article IX of the Merger Agreement only), Allegro MicroSystems, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“AML”), Silicon Structures LLC, a Delaware limited liability company and wholly owned subsidiary of AML (“Merger Sub”), Crocus Technology International Corp., a Delaware corporation (“Crocus”), and NanoDimension Management Limited, as the representative of the Crocus shareholders. Pursuant to the terms and conditions of the Merger Agreement, on October 31, 2023 (the “Closing Date”), Merger Sub merged with and into Crocus, with Crocus continuing as the surviving corporation and as a wholly owned subsidiary of Merger Parent (the “Transaction”). The aggregate purchase price paid by the Company on the Closing Date was $420 million in cash, subject to certain adjustments, including a reduction in the purchase price in consideration of the repayment of the Crocus Loans described below.
On September 11, 2023, AML entered into a loan agreement with Crocus, wherein Crocus provided an initial promissory note to AML for a principal amount of $4 million (the “Initial Crocus Loan”). On October 2, 2023, AML entered into an additional subordinated promissory note agreement with Crocus, wherein Crocus issued a promissory note to AML in the principal amount of $3 million, (the “Subsequent Crocus Loan,” and together with the Initial Crocus Loan, the “Crocus Loans”). Each note was to be repaid, the outstanding principal amount, together with the interest, which accrued from the date of the note, on the unpaid principal balance at a rate equal to 12.5% per annum, computed on the basis of the actual number of days elapsed and year of 365 days. All unpaid principal, together with any then unpaid an accrued interest and other amounts payable hereunder, were due and payable on the earlier of (i) September 11, 2027 or (ii) when, upon the occurrence and during the continuance of an event of default, such amounts are declared due and payable by AML or made automatically due and payable, in each case, in accordance with the terms hereof. The Crocus Loans were repaid in full in connection with the closing of the Transaction described above.
On October 31, 2023, we entered into a $250 million term loan maturing in 2030 (the “Term Loan”), the proceeds of which were used to refinance all outstanding term loans under the term loan agreement dated September 30, 2020, with Credit Suisse AG, Cayman Islands Branch, as administrative agent, collateral agent, and the other agents, arrangers and lenders parties thereto and to finance, in part, the Transaction. The Term Loan was documented as an incremental amendment to the revolving facility credit agreement dated June 21, 2023 (the “2023 Revolving Credit Agreement”) with Morgan Stanley Senior Funding, Inc., as administrative agent, collateral agent, a letter of credit issuer and a lender, and the other agents, lenders and letter of credit issuers parties thereto. The Term Loan amortizes at a rate of 1.00% per annum, and the initial margin applicable to the Term Loan will be 2.75% for term SOFR-based loans and 1.75% for base rate loans.
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:
Inflation
Inflation rates in the markets in which we operate have increased and may continue to rise. Inflation over the last several quarters has led us to experience higher costs, including higher labor costs, wafer and other costs for materials from suppliers, and transportation and energy costs. Our suppliers have raised their prices and may continue to raise prices, and in the competitive markets in which we operate, we may not be able to make corresponding price increases to preserve our gross margins and profitability. If inflation rates continue to rise or remain elevated for a sustained period of time, they could have a material adverse effect on our business, financial condition, results of operations and liquidity. While we have generally been able to offset increases in these costs through various productivity and cost reduction initiatives, as well as adjusting our selling prices and releasing new products with improved gross margins, our ability to increase our average selling prices depends on market conditions and competitive dynamics. Given the timing of our actions compared to the timing of these inflationary pressures, there may be periods during which we are unable to fully recover the increases in our costs.
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 original equipment manufacturer 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 sales can be lengthy, typically between two and four years. As a result, our future sales are highly dependent on our continued success at winning design mandates from our customers. Further, despite current inflationary and pricing conditions, we expect the average sales prices (“ASPs”) of our products to decline over time, and we consider design wins to be critical to our future success. We 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 introduction and market acceptance of our customers’ 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. However, 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. While we historically have permitted order cancellations for most customers, most of our current customer order backlog is noncancellable, which helps mitigate our exposure to unforeseen order cancellations. However, 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 expose us to the risks of inventory shortages or excess inventory. We are currently operating in an inflationary environment.
Manufacturing Costs and Product Mix
Gross margin 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, despite current price leverage, we expect their ASPs to decline in the long term. 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 has historically been highly cyclical and is characterized by increasingly rapid technological change, product obsolescence, competitive pricing pressures, evolving standards, short product life cycles in consumer and other rapidly changing markets 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.
2017 Tax Cuts and Jobs Act
Pursuant to the 2017 Tax Cuts and Jobs Act, beginning in fiscal year 2023, U.S. tax law now requires us to capitalize and amortize domestic and foreign research and development expenditures over five and 15 years, for domestic and foreign research, respectively (“174 Capitalization”). The impact of 174 Capitalization for fiscal year 2024 is an increase in annual cash taxes of approximately $20 million and an FDII benefit of $9 million. While it is possible that Congress may modify this provision, potentially with retroactive effect, we have no assurance that this provision will be reversed. Additionally, the Internal Revenue Service has issued Notice 2023-63 and is expected to issue final guidance which may modify this law change or its impact.
Results of Operations
Three-Month Period Ended September 29, 2023 Compared to Three-Month Period Ended September 23, 2022
The following table summarizes our results of operations and our results of operations as a percentage of total net sales for the three-month periods ended September 29, 2023 and September 23, 2022.
(Dollars in thousands)
| Three-Month Period Ended September 29, 2023 | As a % of Net Sales | Three-Month Period Ended September 23, 2022 | As a % of Net Sales | Change $% | ||
|---|---|---|---|---|---|---|
| Total net sales (1) | $275,509 | 100.0% | $237,666 | 100.0% | $37,843 | 15.9% |
| Cost of goods sold (1) | 116,006 | 42.1% | 105,644 | 44.5% | 10,362 | 9.8% |
| Gross profit | 159,503 | 57.9% | 132,022 | 55.5% | 27,481 | 20.8% |
| Operating expenses: | ||||||
| Research and development | 43,428 | 15.8% | 35,567 | 15.0% | 7,861 | 22.1% |
| Selling, general and administrative | 43,160 | 15.7% | 36,617 | 15.4% | 6,543 | 17.9% |
| Total operating expenses | 86,588 | 31.4% | 72,184 | 30.4% | 14,404 | 20.0% |
| Operating income | 72,915 | 26.5% | 59,838 | 25.2% | 13,077 | 21.9% |
| Other income (expense), net: | ||||||
| Interest expense | (758) | -0.3% | (531) | (0.2)% | (227) | 42.7% |
| Interest income | 850 | 0.3% | 467 | 0.2% | 383 | 82.0% |
| Other income (expense), net | 64 | 0.0% | (688) | (0.3)% | 752 | (109.3)% |
| Income before income tax provision | 73,071 | 26.5% | 59,086 | 24.9% | 13,985 | 23.7% |
| Income tax provision | 7,400 | 2.7% | 8,438 | 3.6% | (1,038) | (12.3)% |
| Net income | 65,671 | 23.8% | 50,648 | 21.3% | 15,023 | 29.7% |
| Net income attributable to non-controlling interests | 54 | 0.0% | 34 | 0.0% | 20 | 58.8% |
| Net income attributable to Allegro MicroSystems, Inc. | $65,617 | 23.8% | $50,614 | 21.3% | $15,003 | 29.6% |
(1) Our total net sales and cost of goods sold for the periods presented above include related party net sales and costs of goods sold generated with Sanken. See our unaudited condensed consolidated financial statements included in this Quarterly Report for additional information regarding our related party net sales for the periods set forth above.
Total net sales
Total net sales increased in the three-month period ended September 29, 2023 compared to the three-month period ended September 23, 2022. This increase was primarily attributable to higher shipments of our e-Mobility products, which includes our advanced driver assistance systems (“ADAS”), electrified vehicle (“EV”), and safety, comfort and convenience applications, partially offset by declines in our consumer and smart home markets.
Sales Trends by Market
The following table summarizes total net sales by market. 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.
(Dollars in thousands)
| Three-Month Period Ended September 29, 2023 | September 23, 2022 | Change Amount% | ||
|---|---|---|---|---|
| Automotive | $205,936 | $157,398 | $48,538 | 30.8% |
| Industrial | 51,114 | 48,176 | 2,938 | 6.1% |
| Other | 18,459 | 32,092 | (13,633) | (42.5)% |
| Total net sales | $275,509 | $237,666 | $37,843 | 15.9% |
Automotive net sales increased in the three-month period ended September 29, 2023 compared to the three-month period ended September 23, 2022, primarily due to higher demand for our ADAS, EV and safety, comfort and convenience applications.
Industrial net sales increased in the three-month period ended September 29, 2023 compared to the three-month period ended September 23, 2022, primarily due to increases in demand for clean energy and automation applications. These increases were partially offset by declines in our data center applications.
Other net sales decreased in the three-month period ended September 29, 2023 compared to the three-month period ended September 23, 2022, primarily due to lower demand for our consumer and smart home markets.
Sales Trends by Product
The following table summarizes net sales by product.
(Dollars in thousands)
| Three-Month Period Ended September 29, 2023 | September 23, 2022 | Change Amount% | ||
|---|---|---|---|---|
| Power integrated circuits (“PIC”) | $99,737 | $97,327 | $2,410 | 2.5% |
| Magnetic sensors (“MS”) and other | 175,772 | 140,339 | 35,433 | 25.2% |
| Total net sales | $275,509 | $237,666 | $37,843 | 15.9% |
The increase in net sales by product was driven by MS product sales. MS sales were driven primarily by our current and isolator products, as well as our magnetic speed sensors, while PIC sales were driven by our high performance power products, offset by a decline in our motor products.
Sales Trends by Geographic Location
The following table summarizes net sales by geographic location based on ship-to location.
(Dollars in thousands)
| Americas: | Three-Month Period Ended September 29, 2023 | September 23, 2022 | Change Amount% | |
|---|---|---|---|---|
| United States | $47,724 | $25,131 | $22,593 | 89.9% |
| Other Americas | 9,539 | 7,244 | 2,295 | 31.7% |
| EMEA: | ||||
| Europe | 46,951 | 40,710 | 6,241 | 15.3% |
| Asia: | ||||
| Japan | 47,275 | 45,026 | 2,249 | 5.0% |
| Greater China | 69,463 | 63,203 | 6,260 | 9.9% |
| South Korea | 29,054 | 20,931 | 8,123 | 38.8% |
| Other Asia | 25,503 | 35,421 | (9,918) | (28.0)% |
| Total net sales | $275,509 | $237,666 | $37,843 | 15.9% |
22
Net sales increased in the three-month period ended September 29, 2023 compared to the three-month period ended September 23, 2022, primarily due to content and market share gains across all geographies, except for Other Asia, which was negatively impacted by data center demand.
North America’s growth was driven by our broad-based industrial markets, internal combustion engine (“ICE”) and e-Mobility applications. Growth in Asia was driven by both China and South Korea which included growth in all areas of the automotive market, including ICE, safety, comfort and convenience, ADAS, and EV.
Cost of goods sold and gross profit
Cost of goods sold increased in the three-month period ended September 29, 2023 compared to the three-month period ended September 23, 2022, primarily due to higher production volume in support of higher product sales, and to a lesser extent, additional excess and obsolete provisions.
Gross profit increased in the three-month period ended September 29, 2023 compared to the three-month period ended September 23, 2022, driven by a $37.8 million increase in net sales due to product mix and volume, partially offset increased cost of goods sold as discussed above.
Research and development expenses
Research and development (“R&D”) expenses increased in the three-month period ended September 29, 2023 in comparison to the comparable period in fiscal year 2023, primarily due to a combined increase in personnel and outside service costs, and an increase in general operating expenses.
R&D expenses as a percentage of our total net sales was 15.8% and 15.0% for the three-month periods ended September 29, 2023 and September 23, 2022, respectively. The increase was primarily due to the impacts noted above.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses increased in the three-month period ended September 29, 2023 compared to the three-month period ended September 23, 2022, primarily due to a combined increase in personnel expenses and outside service costs, and an increase in general operating expenses, partially offset by reduced variable compensation accruals.
SG&A expenses as a percentage of our total net sales was 15.7% and 15.4% in the three-month period ended September 29, 2023 and September 23, 2022, respectively. The increase was primarily due to the impacts noted above.
Interest expense and interest income
Interest expense increased in the three-month period ended September 29, 2023 compared to the three-month period ended September 23, 2022, due to higher interest payments on the Term Loan Facility. Interest income increased compared to the three-month period ended September 23, 2022, primarily due to higher cash balances maintained and higher interest rates.
Other income(expense), net
We recorded a foreign currency transaction gain in both of three-month periods ended September 29, 2023 and September 23, 2022. The foreign currency transaction gain recorded in the three-month period ended September 29, 2023 was primarily due to realized and unrealized gains from the British Pound strengthening against the Euro in our United Kingdom location, partially offset by the U.S. Dollar strengthening against the Peso from our Philippine location.
Unrealized losses of $2.3 million related to our investment in marketable securities were offset by $3.7 million of gains related to sales of our investment in marketable securities and earnings in our money market fund deposits in the three-month period ended September 29, 2023.
Income tax provision
Income tax provision and the effective income tax rate were $7.4 million and 10.1%, respectively, in the three-month period ended September 29, 2023 and $8.4 million and 14.3%, respectively, in the three-month period ended September 23, 2022. The effective tax rate (“ETR”) year-over-year was primarily impacted by reductions in global intangible low-tax income (”GILTI”), Subpart F, and non-deductible stock-based compensation charges, offset by a decrease in FDII benefits as a percent of global profit before tax. The ETR year-over-year was also reduced by discrete tax benefits related to stock-based compensation windfalls realized in the period ended September 29, 2023.
Six-Month Period Ended September 29, 2023 Compared to Six-Month Period Ended September 23, 2022
The following table summarizes our results of operations and our results of operations as a percentage of total net sales for the six-month periods ended September 29, 2023 and September 23, 2022.
(Dollars in thousands)
| Six-Month Period Ended September 29, 2023 | As a % of Net Sales | Six-Month Period Ended September 23, 2022 | As a % of Net Sales | Change $% | ||
|---|---|---|---|---|---|---|
| Total net sales (1) | $553,802 | 100.0% | $455,419 | 100.0% | $98,383 | 21.6% |
| Cost of goods sold (1) | 236,349 | 42.7% | 205,023 | 45.0% | 31,326 | 15.3% |
| Gross profit | 317,453 | 57.3% | 250,396 | 55.0% | 67,057 | 26.8% |
| Operating expenses: | ||||||
| Research and development | 86,403 | 15.6% | 69,424 | 15.2% | 16,979 | 24.5% |
| Selling, general and administrative | 87,389 | 15.8% | 106,397 | 23.4% | (19,008) | (17.9)% |
| Total operating expenses | 173,792 | 31.4% | 175,821 | 38.6% | (2,029) | (1.2)% |
| Operating income | 143,661 | 25.9% | 74,575 | 16.4% | 69,086 | 92.6% |
| Other income (expense), net: | ||||||
| Interest expense | (1,527) | (0.3)% | (968) | (0.2)% | (559) | 57.7% |
| Interest income | 1,693 | 0.3% | 784 | 0.2% | 909 | 115.9% |
| Other income (expense), net | (2,652) | (0.5)% | (3,057) | (0.7)% | 405 | (13.2)% |
| Income before income tax provision | 141,175 | 25.5% | 71,334 | 15.7% | 69,841 | 97.9% |
| Income tax provision | 14,615 | 2.6% | 10,403 | 2.3% | 4,212 | 40.5% |
| Net income | 126,560 | 22.9% | 60,931 | 13.4% | 65,629 | 107.7% |
| Net income attributable to non-controlling interests | 93 | 0.0% | 70 | 0.0% | 23 | 32.9% |
| Net income attributable to Allegro MicroSystems, Inc. | $126,467 | 22.8% | $60,861 | 13.4% | $65,606 | 107.8% |
(1) Our total net sales and cost of goods sold for the periods presented above include related party net sales and costs of goods sold generated with Sanken. See our unaudited condensed consolidated financial statements included in this Quarterly Report for additional information regarding our related party net sales for the periods set forth above.
Total net sales
Total net sales increased in the six-month period ended September 29, 2023 compared to the six-month period ended September 23, 2022. This increase was primarily attributable to higher shipments of our e-Mobility products, which includes our ADAS, EV, and safety comfort and convenience applications, and broad-based industrial applications, which includes clean energy and automation, partially offset by declines in our consumer and smart home markets.
Sales Trends by Market
The following table summarizes total net sales by market. 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.
(Dollars in thousands)
| Six-Month Period Ended September 29, 2023 | September 23, 2022 | Change Amount% | ||
|---|---|---|---|---|
| Automotive | $395,634 | $307,047 | $88,587 | 28.9% |
| Industrial | 119,298 | 88,316 | 30,982 | 35.1% |
| Other | 38,870 | 60,056 | (21,186) | (35.3)% |
| Total net sales | $553,802 | $455,419 | $98,383 | 21.6% |
Automotive net sales increased in the six-month period ended September 29, 2023 compared to the six-month period ended September 23, 2022, primarily due to higher demand for our ADAS, EV and safety, comfort and convenience applications.
Industrial net sales increased in the six-month period ended September 29, 2023 compared to the six-month period ended September 23, 2022, primarily due to increases in demand for clean energy and automation. These increases were partially offset by declines in our data center applications.
Other net sales decreased in the six-month period ended September 29, 2023 compared to the six-month period ended September 23, 2022, primarily due to lower demand for our consumer and smart home markets.
Sales Trends by Product
The following table summarizes net sales by product.
(Dollars in thousands)
| Six-Month Period Ended September 29, 2023 | September 23, 2022 | Change Amount% | ||
|---|---|---|---|---|
| Power integrated circuits (“PIC”) | $203,725 | $177,987 | $25,738 | 14.5% |
| Magnetic sensors (“MS”) and other | 350,077 | 277,432 | 72,645 | 26.2% |
| Total net sales | $553,802 | $455,419 | $98,383 | 21.6% |
The increase in net sales by product was driven by increases in both PIC and MS product sales. MS sales were driven primarily by our current and isolator products, as well as our magnetic sensors, while PIC sales were driven by our motors and high performance power products.
Sales Trends by Geographic Location
The following table summarizes net sales by geographic location based on ship-to location.
(Dollars in thousands)
| Americas: | Six-Month Period Ended September 29, 2023 | September 23, 2022 | Change Amount% | |
|---|---|---|---|---|
| United States | $96,548 | $53,522 | $43,026 | 80.4% |
| Other Americas | 18,047 | 13,731 | 4,316 | 31.4% |
| EMEA: | ||||
| Europe | 102,339 | 76,043 | 26,296 | 34.6% |
| Asia: | ||||
| Japan | 88,855 | 86,735 | 2,120 | 2.4% |
| Greater China | 131,679 | 118,319 | 13,360 | 11.3% |
| South Korea | 58,567 | 41,910 | 16,657 | 39.7% |
| Other Asia | 57,767 | 65,159 | (7,392) | (11.3)% |
| Total net sales | $553,802 | $455,419 | $98,383 | 21.6% |
Net sales increased in the six-month period ended September 29, 2023 compared to the six-month period ended September 23, 2022, primarily due to content and market share gains across all geographies, except for Other Asia, which was negatively impacted by a reduction in data center demand.
Our largest growth was in North America and Europe driven by our broad-based industrial markets, industrial automation and e-Mobility applications. Growth in Asia was driven by both China and South Korea which included growth in all areas of the automotive market, including ICE, safety, comfort and convenience, ADAS and EV.
Cost of goods sold and gross profit
Cost of goods sold increased in the six-month period ended September 29, 2023 compared to the six-month period ended September 23, 2022, primarily due to higher production volume in support of higher product sales, and to a lesser extent additional inventory reserves and stock-based compensation.
Gross profit increased in the six-month period ended September 29, 2023 compared to the six-month period ended September 23, 2022, driven by a $98.4 million increase in net sales across primarily all markets, partially offset by increased cost of goods sold as discussed above.
Research and development expenses
R&D expenses increased in the six-month period ended September 29, 2023 compared to the comparable period in fiscal year 2023, primarily due to a combined increase in personnel, stock-based compensation and outside service costs, in addition to a general increase in operating expenses.
R&D expenses as a percentage of our total net sales remained relatively consistent at 15.6% and 15.2% for the six-month periods ended September 29, 2023 and September 23, 2022, respectively.
Selling, general and administrative expenses
SG&A expenses decreased in the six-month period ended September 29, 2023 compared to the six-month period ended September 23, 2022, primarily due to the inclusion, in the six-month period ended September 23, 2022, of accelerated stock-based compensation expense of $26.3 million related to the retirement of our former chief executive officer and $3.8 million of severance due to changes in leadership, partially offset by increased professional fees and outside services costs and personnel increases in the six-month period ended September 29, 2023.
SG&A expenses as a percentage of our total net sales were 15.8% and 23.4% in the six-month periods ended September 29, 2023 and September 23, 2022, respectively. The decrease was primarily due to the impacts noted above.
Interest expense and interest income
Interest expense increased in the six-month period ended September 29, 2023 compared to the six-month period ended September 23, 2022, due to higher interest payments on the Term Loan Facility. Interest income increased compared to the six-month period ended September 23, 2022, primarily due to higher cash balances maintained and higher interest rates.
Other income (expense), net
We recorded a foreign currency transaction loss in the six-month period ended September 29, 2023 compared to a foreign currency transaction gain in the six-month period ended September 23, 2022. The foreign currency transaction loss recorded in the six-month period ended September 29, 2023 was primarily due to the realized and unrealized losses from the U.S. Dollar strengthening against the Peso from our Philippine location.
Unrealized losses of $11.2 million related to our investment in marketable securities were offset by $10.6 million of gains related to sales of our investment in marketable securities and earnings in our money market fund deposits in the six-month period ended September 29, 2023, compared to unrealized losses of $3.5 million during the six-month period ended September 23, 2022.
Income tax provision
Income tax provision and the effective income tax rate were $14.6 million and 10.4%, respectively, in the six-month period ended September 29, 2023 and $10.4 million and 14.6%, respectively, in the six-month period ended September 23, 2022. The ETR year-over-year was primarily impacted by reductions in GILTI, Subpart F, and non-deductible stock-based compensation charges offset by a decrease in FDII benefits as a percent of global profit before tax. The ETR year-over-year was also reduced by discrete tax benefits related to stock-based compensation windfalls realized in the period ended September 29, 2023.
Liquidity and Capital Resources
As of September 29, 2023, we had $370.0 million of cash and cash equivalents and $580.7 million of working capital compared to $351.6 million of cash and cash equivalents and $500.5 million of working capital as of March 31, 2023. Working capital is impacted by the timing and extent of our business needs.
Our primary requirements for liquidity and capital resources besides our growth initiatives 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. Our current capital deployment strategy for fiscal 2024 is to utilize cash on hand and capacity under our 2023 Revolving Credit Facility to support our continued growth initiatives into select markets, planned capital expenditures, as well as consider potential acquisitions. As of September 29, 2023, the Company was not party to any off-balance sheet arrangements 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. The cash requirements for the second half of the fiscal year relate to our operating leases, operating and capital purchase commitments, our acquisition of Crocus and expected contributions to our defined benefit and contribution plans. Additionally, we expect to continue to invest in expanding our operations in China, Europe, Japan and India in order to directly manage and service our customers in these markets, which could result in increases in our total net sales, cost of goods sold and operating expenses. For information regarding the Company’s expected cash requirements and timing of payments related to leases, noncancellable purchase commitments and pension and defined contribution plans, see Note 12, “Leases,” Note 16, “Commitments and Contingencies” and Note 15 “Retirement Plans” to the audited consolidated financial statements in the Company’s 2023 Annual Report.
We believe that our existing cash will be sufficient to finance our continued operations, growth strategy, planned capital expenditures and the additional expenses that we expect to incur during the next 12 months. In order to support and achieve our future growth plans, we may need or seek advantageously to obtain additional funding through equity or debt financing. We believe that our current operating structure will facilitate sufficient cash flows from operations to satisfy our expected long-term liquidity requirements beyond the next 12 months. If these resources are not sufficient to satisfy our liquidity requirements due to changes in circumstances, we may be required to borrow under our 2023 Revolving Credit Facility or 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 six-month periods ended September 29, 2023 and September 23, 2022:
(dollars in thousands)
| Six-Month Period Ended September 29, 2023 | September 23, 2022 | |
|---|---|---|
| Net cash provided by operating activities | $96,393 | $91,804 |
| Net cash used in investing activities | (59,926) | (54,948) |
| Net cash used in financing activities | (15,767) | (14,596) |
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | (974) | (8,777) |
| Net increase in cash and cash equivalents and restricted cash | $19,726 | $13,483 |
Operating Activities
Net cash provided by operating activities was $96.4 million in the six-month period ended September 29, 2023, resulting primarily from net income of $126.6 million and noncash charges of $46.3 million, partially offset by a net decrease in cash from an increase in net operating assets and liabilities of $76.5 million. The net increase in operating assets and liabilities consisted of a $31.2 million increase in inventories, a $29.9 million decrease in accrued expenses and other current and long-term liabilities, a $16.1 million increase in prepaid expenses and other assets, and a $7.6 million increase in trade accounts receivable, net, partially offset by a $2.7 million increase in trade accounts payable, and a $6.1 million increase in net amounts due to related party. The increase in inventories was primarily the result of inventory builds to support anticipated sales growth for the remainder of fiscal 2024. The increase in prepaid expenses and other assets were mostly due to higher long-term deposits and the timing of tax payments, including value-added taxes receivable, insurance and contract costs. The decrease in accrued expenses and other current and long-term liabilities was primarily the result of a reduction in accrued personnel costs due to timing of payments pursuant to our annual incentive compensation plan. The increase in trade accounts receivable, net was primarily a result of increased sales year-over-year, as well as the timing of receipts. Accounts payable increased primarily due to the timing of payments to suppliers and vendors, partially offset by higher operating purchases, including unpaid capital expenditures of $20.0 million. The increase in net amounts due to related parties was primarily due to variations in the timing of such payments in the ordinary course of business.
Net cash provided by operating activities was $91.8 million in the six-month period ended September 23, 2022, resulting primarily from our net income of $60.9 million and noncash charges of $51.3 million, including a one-time charge of approximately $26.3 million related to the acceleration of stock-based compensation expense from the retirement of our former chief executive officer, partially offset by a net decrease in operating assets and liabilities of $20.5 million. Net changes in operating assets and liabilities consisted of a $17.3 million increase in inventories, a $9.5 million increase in prepaid expenses, a $5.7 million decrease in net amounts due from related parties, and a $5.0 million decrease in accrued expenses and other current and long-term liabilities, partially offset by an $8.9 million increase in trade accounts payable, a $5.5 million decrease in trade accounts receivable, net, and a $2.5 million decrease in other receivables. The increase in inventories was primarily the result of inventory builds to support anticipated sales growth in fiscal 2023. The increases in prepaid expenses and other assets were mostly due to higher long-term deposits and the timing of tax payments, including value-added taxes receivable, insurance and contract costs. The decrease in net amounts due to related parties 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 were primarily the result of lower accrued personnel costs, including management incentives, and a reduction in the balance due on the acquisition of Voxtel, Inc. (“Voxtel”). Accounts payable increased mainly due to the timing of payments to suppliers and vendors, partially offset by higher operating purchases, including unpaid capital expenditures of $3.9 million. The decrease in trade accounts receivable, net was primarily due to the timing of receipts from customers. The decrease in other receivables was primarily due to increased distributor sales year-over-year, as well as timing of receipts from Sanken.
Investing Activities
Net cash used in investing activities was $59.9 million in the six-month period ended September 29, 2023, consisting of purchases of property, plant and equipment of $76.1 million and proceeds from the sale of marketable securities of $16.2 million.
Net cash used in investing activities was $54.9 million in the six-month period ended September 23, 2022, consisting of purchases of property, plant and equipment of $35.2 million and payments related to the acquisition of Heyday Integrated Circuits of $19.7 million.
Financing Activities
Net cash used in financing activities was $15.8 million in the six-month period ended September 29, 2023, primarily consisting of taxes related to the net settlement of equity awards, additional funds loaned under the new Note Purchase Agreement between us and Crocus and payments of debt issuance costs in connection with the 2023 Revolving Credit Facility, partially offset by proceeds received in connection with the issuance of common stock under our employee stock purchase plan and proceeds received related to the quarterly payment from PSL on our related party loan.
Net cash used in financing activities was $14.6 million in the six-month period ended September 23, 2022, consisting of taxes related to the net settlement of equity awards and additional funds loaned to Polar Semiconductor, LLC (“PSL”) under our related party loan agreement, partially offset by proceeds received in connection with the issuance of common stock under our employee stock purchase plan and proceeds received related to the quarterly payment from PSL on our related party loan.
Debt Obligations
See Note 9, “Debt and Other Borrowings” in the unaudited condensed consolidated financial statements included in this Quarterly Report for information regarding our debt obligations.
Recent Accounting Pronouncements
See Note 2, “Summary of Significant Accounting Policies” in the unaudited condensed 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.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2023 Annual Report. There have been no material changes in our critical accounting policies and estimates since March 31, 2023.
Market risk
As filed, 302 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
There have not been any material changes in our exposures to market risk since March 31, 2023. For details on the Company’s interest rate, foreign currency exchange rate, and inflation risks, see “Part I, Item 7A. “Quantitative and Qualitative Information About Market Risks” in our 2023 Annual Report.
Controls and procedures
As filed, 1,673 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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 Securities Exchange Act of 1934, as amended (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 Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of September 29, 2023. Based on the evaluation of our disclosure controls and procedures as of September 29, 2023, 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 were no changes 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 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Risk factors
As filed, 2,209 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Various risk factors associated with our business are included in our Annual Report on Form 10-K for the year ended March 31, 2023, as filed with the Commission on May 21, 2023, and available at www.sec.gov (http://www.sec.gov). Other than as set forth below, there have been no material changes to those risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
Acquisitions of other companies or technologies, may create additional risks, including risks associated with our ability to successfully integrate these acquisitions into our business.
We have acquired other companies as part of our growth strategy, and we continue to consider future acquisitions of other companies, or their technologies or products, to improve our market position, broaden our technological capabilities, and expand our product offerings. Acquiring companies or technologies, including the recently completed acquisition of Crocus, involves a number of risks, including, but not limited to:
- the potential disruption of our ongoing business;
- the increased costs incurred to finance acquisitions and the allocation of capital to fund acquisitions being diverted from other operational priorities such as research and development;
- unexpected costs or incurring unknown liabilities;
- the diversion of management resources from other strategic and operational issues;
- the inability to retain the key employees of the acquired businesses;
- difficulties relating to integrating the operations and personnel of the acquired businesses;
- adverse effects on our existing customer relationships or the existing customer relationships of acquired businesses;
- the potential incompatibility of the acquired business or their business customers;
- issues not discovered during our due diligence that could impact our assumption concerning the status of and prospects for the products and technologies of the acquired business; and
- acquired intangible assets, including goodwill, becoming impaired as a result of technological advancements or worse-than-expected performance of the acquired business.
If we are unable to successfully address any of these risks, our business could be harmed.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2023-09-29. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2023-07-01 to 2023-09-29 | $275.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months2023-04-01 to 2023-09-29 | $553.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months2023-07-01 to 2023-09-29 | $114.1m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months2023-04-01 to 2023-09-29 | $234.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months2023-07-01 to 2023-09-29 | $159.5m | us-gaap:GrossProfit |
| Gross profit | 6 months2023-04-01 to 2023-09-29 | $317.5m | us-gaap:GrossProfit |
| Research and development | 3 months2023-07-01 to 2023-09-29 | $43.4m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months2023-04-01 to 2023-09-29 | $86.4m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months2023-07-01 to 2023-09-29 | $43.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months2023-04-01 to 2023-09-29 | $87.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months2023-07-01 to 2023-09-29 | $72.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months2023-04-01 to 2023-09-29 | $143.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months2023-07-01 to 2023-09-29 | $758.0k | us-gaap:InterestExpense |
| Interest expense | 6 months2023-04-01 to 2023-09-29 | $1.5m | us-gaap:InterestExpense |
| Income tax | 3 months2023-07-01 to 2023-09-29 | $7.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months2023-04-01 to 2023-09-29 | $14.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2023-07-01 to 2023-09-29 | $65.6m | us-gaap:NetIncomeLoss |
| Net income | 6 months2023-04-01 to 2023-09-29 | $126.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2023-07-01 to 2023-09-29 | $0.34 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months2023-04-01 to 2023-09-29 | $0.65 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2023-07-01 to 2023-09-29 | $0.34 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months2023-04-01 to 2023-09-29 | $0.66 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2023-07-01 to 2023-09-29 | 195,100,855 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months2023-04-01 to 2023-09-29 | 195,055,495 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months2023-04-01 to 2023-09-29 | $96.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months2023-04-01 to 2023-09-29 | $76.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | At period end2023-09-29 | $370.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2023-09-29 | $714.9m | us-gaap:AssetsCurrent |
| Total assets | At period end2023-09-29 | $1.28bn | us-gaap:Assets |
| Current liabilities | At period end2023-09-29 | $134.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2023-09-29 | $186.6m | us-gaap:Liabilities |
| Shareholders' equity | At period end2023-09-29 | $1.10bn | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0000950170-23-059019. Last ingested by Listed: Oct 30, 2026, 09:01 ET. Listed shows no prices and gives no investment advice.