Allegro Microsystems, Inc.: Form 10-Q for the period ended Dec 29, 2023
Filed with the SEC on Feb 6, 2024 and accepted by EDGAR at Feb 6, 2024, 16:05 ET.
Management's discussion and analysis
As filed, 48,389 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 SEC 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 our Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2023, filed with the SEC on November 6, 2023. 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 29, 2023 and December 23, 2022 relate to the 13- and 39-week periods ended December 29, 2023 and December 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 nine-month periods ended December 29, 2023, we generated $255.0 million and $808.8 million in total net sales, respectively, with $33.4 million and $160.0 million in net income, respectively. During the three- and nine-month periods ended December 23, 2022, we generated $248.8 million and $704.2 million in total net sales, respectively, with $64.6 million and $125.5 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 AML (the “Transaction”). The aggregate purchase price paid by the Company on the Closing Date was $412.3 million in cash, subject to certain remaining working capital adjustments.
On September 11, 2023, AML entered into a note purchase agreement with Crocus, wherein AML agreed to purchase subordinated promissory notes up to the principal amount of $7 million, subject to certain terms and conditions contained in the note purchase agreement. AML issued an initial subordinated promissory note to Crocus in the principal amount of $4 million on September 11, 2023 and an additional subordinated promissory note in the principal amount of $3 million on October 2, 2023 (collectively the “Crocus Loans”). Interest on each of the Crocus Loans 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 a year consisting of 365 days. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable thereunder, 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 were declared due and payable by AML or made automatically due and payable, in each case, in accordance with the terms thereof. 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 “2023 Term Loan Facility”), the proceeds of which were used to repay 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 2023 Term Loan Facility was executed 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 2023 Term Loan Facility amortizes at a rate of 0.25% per quarter, and the initial margin applicable to the 2023 Term Loan Facility is 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 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 a foreign derived intangible income (“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 2024-12 and is expected to issue final guidance which may modify this law change or its impact.
Results of Operations
Three-Month Period Ended December 29, 2023 Compared to Three-Month Period Ended December 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 December 29, 2023 and December 23, 2022.
(Dollars in thousands)
| Three-Month Period Ended December 29, 2023 | As a % of Net Sales | Three-Month Period Ended December 23, 2022 | As a % of Net Sales | Change $% | ||
|---|---|---|---|---|---|---|
| Total net sales (1) | $254,984 | 100.0% | $248,789 | 100.0% | $6,195 | 2.5% |
| Cost of goods sold (1) | 121,156 | 47.5% | 106,195 | 42.7% | 14,961 | 14.1% |
| Gross profit | 133,828 | 52.5% | 142,594 | 57.3% | (8,766) | (6.1)% |
| Operating expenses: | ||||||
| Research and development | 44,396 | 17.4% | 39,593 | 15.9% | 4,803 | 12.1% |
| Selling, general and administrative | 52,746 | 20.7% | 37,373 | 15.0% | 15,373 | 41.1% |
| Total operating expenses | 97,142 | 38.1% | 76,966 | 30.9% | 20,176 | 26.2% |
| Operating income | 36,686 | 14.4% | 65,628 | 26.4% | (28,942) | (44.1)% |
| Other income (expense), net: | ||||||
| Interest expense | (3,854) | -1.5% | (613) | (0.2)% | (3,241) | 528.7% |
| Interest income | 857 | 0.3% | 360 | 0.1% | 497 | 138.1% |
| Other income (expense), net | 2,682 | 1.1% | 6,716 | 2.7% | (4,034) | (60.1)% |
| Income before income tax provision | 36,371 | 14.3% | 72,091 | 29.0% | (35,720) | (49.5)% |
| Income tax provision | 2,969 | 1.2% | 7,540 | 3.0% | (4,571) | (60.6)% |
| Net income | 33,402 | 13.1% | 64,551 | 25.9% | (31,149) | (48.3)% |
| Net income attributable to non-controlling interests | 57 | 0.0% | 32 | 0.0% | 25 | 78.1% |
| Net income attributable to Allegro MicroSystems, Inc. | $33,345 | 13.1% | $64,519 | 25.9% | $(31,174) | (48.3)% |
(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 December 29, 2023 compared to the three-month period ended December 23, 2022. This increase was primarily attributable to higher shipments of our e-Mobility products, which includes our advanced driver assistance systems (“ADAS”) and electrified vehicle (“EV”) applications, safety, comfort and convenience applications and data center applications, partially offset by declines in our internal combustion engine (“ICE”) applications and broad-based and other industrial applications, including clean energy and automation, as well as consumer and smart home markets.
Sales Trends by Market
During the preparation of the third quarter fiscal year 2024 interim condensed consolidated financial statements, the Company identified an immaterial error in the classification of net sales by application, whereby customer returns and sales allowances were incorrectly classified by application between Automotive, Industrial and Other in the prior periods. There was no impact to previously reported total net sales or net income in any of the periods.
The Company assessed the materiality of the revision qualitatively and quantitatively and determined the revisions to be immaterial to the prior period interim fiscal year 2024, annual fiscal year 2023, and annual fiscal year 2022 consolidated financial statements. All prior period amounts have been revised in the tables below.
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 December 29, 2023 | December 23, 2022 | Change Amount% | ||
|---|---|---|---|---|
| Automotive | $194,764 | $164,719 | $30,045 | 18.2% |
| Industrial | 45,949 | 53,737 | (7,788) | (14.5)% |
| Other | 14,271 | 30,333 | (16,062) | (53.0)% |
| Total net sales | $254,984 | $248,789 | $6,195 | 2.5% |
Automotive net sales increased in the three-month period ended December 29, 2023 compared to the three-month period ended December 23, 2022, primarily due to higher demand for our e-Mobility applications.
Industrial net sales decreased in the three-month period ended December 29, 2023 compared to the three-month period ended December 23, 2022, primarily due to a decrease in demand of our broad-based and other industrial applications.
Other net sales decreased in the three-month period ended December 29, 2023 compared to the three-month period ended December 23, 2022, primarily due to lower demand for our consumer and smart home applications.
Sales Trends by Product
The following table summarizes net sales by product.
(Dollars in thousands)
| Three-Month Period Ended December 29, 2023 | December 23, 2022 | Change Amount% | ||
|---|---|---|---|---|
| Power integrated circuits (“PIC”) | $101,426 | $94,513 | $6,913 | 7.3% |
| Magnetic sensors (“MS”) and other | 153,558 | 154,276 | (718) | (0.5)% |
| Total net sales | $254,984 | $248,789 | $6,195 | 2.5% |
The increase in net sales by product was driven by PIC sales. PIC sales were driven by our high-performance power and motor products. The decrease in MS and other sales was due to a decline in MS sales, offset by an increase in current and isolator 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 December 29, 2023 | December 23, 2022 | Change Amount% | |
|---|---|---|---|---|
| United States | $28,481 | $33,613 | $(5,132) | (15.3)% |
| Other Americas | 7,718 | 6,473 | 1,245 | 19.2% |
| EMEA: | ||||
| Europe | 36,870 | 39,650 | (2,780) | (7.0)% |
| Asia: | ||||
| Greater China | 77,331 | 64,305 | 13,026 | 20.3% |
| Japan | 42,250 | 45,117 | (2,867) | (6.4)% |
| South Korea | 27,710 | 25,504 | 2,206 | 8.6% |
| Other Asia | 34,624 | 34,127 | 497 | 1.5% |
| Total net sales | $254,984 | $248,789 | $6,195 | 2.5% |
Net sales increased in the three-month period ended December 29, 2023 compared to the three-month period ended December 23, 2022, primarily due to product mix and market share gains in Asia. The decline in the United States was driven by clean energy and automation applications, while a decline in Europe was driven by a reduction in both broad-based applications and clean energy and automation application offset by an increase in automotive sales.
Growth in Asia was primarily driven by China, which included growth in the automotive market, both ADAS and EV, which overshadowed a decrease in both Industrial Market sales and Other Sales.
Cost of goods sold and gross profit
Cost of goods sold increased in the three-month period ended December 29, 2023 compared to the three-month period ended December 23, 2022, primarily due to higher production volume and product mix, as well as the addition of cost of goods sold acquired from Crocus.
Gross profit decreased in the three-month period ended December 29, 2023 compared to the three-month period ended December 23, 2022, partially driven by the increased cost of goods sold as discussed above, and the change in product mix, offsetting the $6.2 million increase in net sales.
Research and development expenses
Research and development (“R&D”) expenses increased in the three-month period ended December 29, 2023 in comparison to the comparable period in fiscal year 2023, primarily due to a combined increase in personnel and outside service costs.
R&D expenses as a percentage of our total net sales was 17.4% and 15.9% for the three-month periods ended December 29, 2023 and December 23, 2022, respectively. The increase was primarily due to the increased costs noted above.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses increased in the three-month period ended December 29, 2023 compared to the three-month period ended December 23, 2022, primarily due to a combined increase in personnel and severance expenses and outside service costs, and an increase in general operating expenses, partially offset by reduced variable compensation expense.
SG&A expenses as a percentage of our total net sales was 20.7% and 15.0% in the three-month period ended December 29, 2023 and December 23, 2022, respectively. The increase was primarily due to the factors noted above.
Interest expense and interest income
Interest expense increased in the three-month period ended December 29, 2023 compared to the three-month period ended December 23, 2022, due to higher interest payments on the 2023 Term Loan Facility, which was used to finance the acquisition of Crocus. Interest income increased compared to the three-month period ended December 23, 2022, primarily due to higher cash balances maintained and higher interest rates throughout the comparable period.
Other income(expense), net
We recorded a foreign currency gain in both of the three-month periods ended December 29, 2023 and December 23, 2022. The foreign currency gain recorded in the three-month period ended December 29, 2023 was primarily due to realized and unrealized gains from our Philippine and France locations. The foreign currency gain recorded in the three-month period ended December 23, 2022, was primarily due to unrealized gains on equity securities denominated in euros, partially offset by losses from our United Kingdom and Philippine locations.
We also recorded a gain of $0.7 million related to our investment in marketable securities and earnings in our money market fund deposits in the three-month period ended December 29, 2023, compared to $0.5 million of miscellaneous gains in the three-month period ended December 23, 2022.
Income tax provision
Income tax provision and the effective income tax rate were $3.0 million and 8.2%, respectively, in the three-month period ended December 29, 2023 and $7.5 million and 10.5%, respectively, in the three-month period ended December 23, 2022. The effective tax rate (“ETR”) year-over-year was primarily impacted by reductions in global intangible low-tax income (“GILTI”) and non-deductible stock-based compensation charges, offset by a decrease in FDII benefits. The ETR year-over-year was also reduced by discrete tax benefits related to stock-based compensation windfalls realized in the period ended December 29, 2023.
Nine-Month Period Ended December 29, 2023 Compared to Nine-Month Period Ended December 23, 2022
The following table summarizes our results of operations and our results of operations as a percentage of total net sales for the nine-month periods ended December 29, 2023 and December 23, 2022.
(Dollars in thousands)
| Nine-Month Period Ended December 29, 2023 | As a % of Net Sales | Nine-Month Period Ended December 23, 2022 | As a % of Net Sales | Change $% | ||
|---|---|---|---|---|---|---|
| Total net sales (1) | $808,786 | 100.0% | $704,208 | 100.0% | $104,578 | 14.9% |
| Cost of goods sold (1) | 357,505 | 44.2% | 311,218 | 44.2% | 46,287 | 14.9% |
| Gross profit | 451,281 | 55.8% | 392,990 | 55.8% | 58,291 | 14.8% |
| Operating expenses: | ||||||
| Research and development | 130,799 | 16.2% | 109,017 | 15.5% | 21,782 | 20.0% |
| Selling, general and administrative | 140,135 | 17.3% | 143,770 | 20.4% | (3,635) | (2.5)% |
| Total operating expenses | 270,934 | 33.5% | 252,787 | 35.9% | 18,147 | 7.2% |
| Operating income | 180,347 | 22.3% | 140,203 | 19.9% | 40,144 | 28.6% |
| Other income (expense), net: | ||||||
| Interest expense | (5,381) | (0.7)% | (1,581) | (0.2)% | (3,800) | 240.4% |
| Interest income | 2,550 | 0.3% | 1,144 | 0.2% | 1,406 | 122.9% |
| Other income (expense), net | 30 | 0.0% | 3,659 | 0.5% | (3,629) | (99.2)% |
| Income before income tax provision | 177,546 | 22.0% | 143,425 | 20.4% | 34,121 | 23.8% |
| Income tax provision | 17,584 | 2.2% | 17,943 | 2.5% | (359) | (2.0)% |
| Net income | 159,962 | 19.8% | 125,482 | 17.8% | 34,480 | 27.5% |
| Net income attributable to non-controlling interests | 150 | 0.0% | 102 | 0.0% | 48 | 47.1% |
| Net income attributable to Allegro MicroSystems, Inc. | $159,812 | 19.8% | $125,380 | 17.8% | $34,432 | 27.5% |
(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 nine-month period ended December 29, 2023 compared to the nine-month period ended December 23, 2022. This increase was primarily attributable to higher shipments of our e-Mobility products, safety comfort and convenience applications, and broad-based and other industrial applications, including clean energy and automation, offset by decline in our data center applications and consumer and smart home products.
Sales Trends by Market
During the preparation of the third quarter fiscal year 2024 interim condensed consolidated financial statements, the Company identified an immaterial error in the classification of net sales by application, whereby customer returns and sales allowances were incorrectly classified by application between Automotive, Industrial and Other in the prior periods. There was no impact to previously reported total net sales or net income in any of the periods.
The Company assessed the materiality of the revision qualitatively and quantitatively and determined the revisions to be immaterial to the prior period interim fiscal year 2024, annual fiscal year 2023, and annual fiscal year 2022 consolidated financial statements. All prior period amounts have been revised in the tables below.
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)
| Nine-Month Period Ended December 29, 2023 | December 23, 2022 | Change Amount% | ||
|---|---|---|---|---|
| Automotive | $577,515 | $467,959 | $109,556 | 23.4% |
| Industrial | 180,021 | 146,797 | 33,224 | 22.6% |
| Other | 51,250 | 89,452 | (38,202) | (42.7)% |
| Total net sales | $808,786 | $704,208 | $104,578 | 14.9% |
Automotive net sales increased in the nine-month period ended December 29, 2023 compared to the nine-month period ended December 23, 2022, primarily due to higher demand for our e-Mobility products and safety, comfort and convenience applications.
Industrial net sales increased in the nine-month period ended December 29, 2023 compared to the nine-month period ended December 23, 2022, primarily due to increases in broad based industrial and other applications, which includes 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 nine-month period ended December 29, 2023 compared to the nine-month period ended December 23, 2022, primarily due to lower demand for our consumer and smart home products.
Sales Trends by Product
The following table summarizes net sales by product.
(Dollars in thousands)
| Nine-Month Period Ended December 29, 2023 | December 23, 2022 | Change Amount% | ||
|---|---|---|---|---|
| PIC | $305,151 | $272,500 | $32,651 | 12.0% |
| MS and other | 503,635 | 431,708 | 71,927 | 16.7% |
| Total net sales | $808,786 | $704,208 | $104,578 | 14.9% |
The increase in net sales by product was driven by increases in both PIC and MS and other product sales. MS and other 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: | Nine-Month Period Ended December 29, 2023 | December 23, 2022 | Change Amount% | |
|---|---|---|---|---|
| United States | $125,029 | $87,135 | $37,894 | 43.5% |
| Other Americas | 25,765 | 20,204 | 5,561 | 27.5% |
| EMEA: | ||||
| Europe | 139,209 | 115,693 | 23,516 | 20.3% |
| Asia: | ||||
| Greater China | 209,010 | 182,624 | 26,386 | 14.4% |
| Japan | 131,105 | 131,852 | (747) | (0.6)% |
| South Korea | 86,277 | 67,414 | 18,863 | 28.0% |
| Other Asia | 92,391 | 99,286 | (6,895) | (6.9)% |
| Total net sales | $808,786 | $704,208 | $104,578 | 14.9% |
Net sales increased in the nine-month period ended December 29, 2023 compared to the nine-month period ended December 23, 2022, primarily due to product mix and market share gains across all geographies, except for Japan and 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 nine-month period ended December 29, 2023 compared to the nine-month period ended December 23, 2022, primarily due to higher production volume and product mix, as well as addition of cost of goods sold acquired from Crocus, and to a lesser extent additional inventory reserves.
Gross profit increased in the nine-month period ended December 29, 2023 compared to the nine-month period ended December 23, 2022, driven by a $104.6 million increase in net sales across nearly all markets, and the increase of cost of goods sold, as discussed above.
Research and development expenses
R&D expenses increased in the nine-month period ended December 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 to fund new product development, partially offset by reduced variable compensation expense.
R&D expenses as a percentage of our total net sales remained relatively consistent at 16.2% and 15.5% for the nine-month periods ended December 29, 2023 and December 23, 2022, respectively.
Selling, general and administrative expenses
SG&A expenses decreased in the nine-month period ended December 29, 2023 compared to the nine-month period ended December 23, 2022, primarily due to the inclusion, in the nine-month period ended December 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, in addition to variable compensation expenses in the current period. These costs are partially offset by increased professional fees, outside services costs and personnel increases in the nine-month period ended December 29, 2023.
SG&A expenses as a percentage of our total net sales were 17.3% and 20.4% in the nine-month periods ended December 29, 2023 and December 23, 2022, respectively. The decrease was primarily due to the inclusion of expenses in the nine-month period ended December 23, 2022 noted above.
Interest expense and interest income
Interest expense increased in the nine-month period ended December 29, 2023 compared to the nine-month period ended December 23, 2022, due to higher interest payments on the 2023 Term Loan Facility, which was used to finance the acquisition of Crocus. Interest income increased compared to the nine-month period ended December 23, 2022, primarily due to higher cash balances maintained throughout the comparable period and higher interest rates.
Other income (expense), net
We recorded a foreign currency loss in the nine-month periods ended December 29, 2023 and a gain in the nine-month period ended December 23, 2022. The foreign currency transaction loss recorded in the nine-month period ended December 29, 2023 was related to our Philippine and United Kingdom locations. The foreign currency gains recorded in the nine-month period ended December 23, 2022 was primarily due to realized and unrealized gains from our United Kingdom location, partially offset by realized and unrealized losses from our Philippine location.
Unrealized losses of $11.2 million related to our investment in marketable securities were offset by $11.3 million of gains related to sales of our investment in marketable securities and earnings in our money market fund deposits in the nine-month period ended December 29, 2023, compared to $0.8 million of miscellaneous gains in the nine-month period ended December 23, 2022.
Income tax provision
Income tax provision and the effective income tax rate were $17.6 million and 9.9%, respectively, in the nine-month period ended December 29, 2023 and $17.9 million and 12.5%, respectively, in the nine-month period ended December 23, 2022. The ETR year-over-year was primarily impacted by reductions in GILTI, and non-deductible stock-based compensation charges, partially offset by a decrease in FDII benefits. The ETR year-over-year was also reduced by discrete tax benefits related to stock-based compensation windfalls realized in the period ended December 29, 2023.
Liquidity and Capital Resources
As of December 29, 2023, we had $214.3 million of cash and cash equivalents and $429.3 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 December 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 remainder of the fiscal year relate to our operating leases, operating and capital purchase commitments, and expected contributions to our defined benefit and contribution plans. Additionally, we expect to continue to strategically 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 nine-month periods ended December 29, 2023 and December 23, 2022:
(dollars in thousands)
| Nine-Month Period Ended December 29, 2023 | December 23, 2022 | |
|---|---|---|
| Net cash provided by operating activities | $168,951 | $145,658 |
| Net cash used in investing activities | (502,444) | (69,291) |
| Net cash provided by (used in) financing activities | 198,148 | (16,694) |
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | 375 | (5,344) |
| Net (decrease) increase in cash and cash equivalents and restricted cash | $(134,970) | $54,329 |
Operating Activities
Net cash provided by operating activities was $169.0 million in the nine-month period ended December 29, 2023, resulting primarily from net income of $160.0 million and noncash charges of $67.9 million, partially offset by a net decrease in cash from an increase in net operating assets and liabilities of $58.9 million. The net increase in operating assets and liabilities consisted of a $19.9 million increase in inventories, a $20.5 million decrease in accrued expenses and other current and long-term liabilities, a $12.6 million increase in prepaid expenses and other assets, a $2.6 million increase in trade accounts receivable, net, and a $9.6 million decrease in trade accounts payable, partially offset by a $6.8 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 decrease in accrued expenses and other current and long-term liabilities was primarily the result of a reduction in accrued personnel costs due to the timing of payments pursuant to our annual incentive compensation plan. The increase in prepaid expenses and other assets was mostly due to higher long-term deposits and the timing of tax payments. The increase in trade accounts receivable, net was primarily a result of increased sales year-over-year, as well as the timing of receipts. Trade accounts payable decreased primarily due to the timing of payments to suppliers and vendors, including unpaid capital expenditures of $2.2 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 $145.7 million in the nine-month period ended December 23, 2022, resulting primarily from our net income of $125.5 million and noncash charges of $59.0 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 cash from an increase in net operating assets of $38.8 million. The net increase in operating assets consisted of a $39.1 million increase in inventories, a $17.8 million increase in prepaid expenses and other assets, a $5.9 million increase in trade accounts receivable, net and a $3.3 million decrease in net amounts due to a related party, partially offset by a $19.6 million increase in trade accounts payable, a $5.7 million increase in accrued expenses and other current and long-term liabilities, and a $2.0 million decrease in other receivables. The increase in inventories was primarily the result of inventory builds to support anticipated sales growth for the remainder of fiscal 2023 and into 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 increase in trade accounts receivable, net was primarily due to higher sales volumes and the timing of receipts from customers. The decrease in net amounts due to a related party was primarily due to variations in the timing of such payments in the ordinary course of business. Trade 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 $2.5 million. The increase in accrued expenses and other current and long-term liabilities was primarily the result of higher warranty costs, accrued personnel costs, income taxes, and accrued operating expenses, partially offset by a reduction in the balance due on the acquisition of Voxtel, Inc. The decrease in other receivables was primarily due to the timing of receipts from Sanken.
Investing Activities
Net cash used in investing activities was $502.4 million in the nine-month period ended December 29, 2023, consisting of payments related to the acquisition of Crocus of $408.1 million and, purchases of property, plant and equipment of $110.5 million, partially offset by proceeds from the sale of marketable securities of $16.2 million.
Net cash used in investing activities was $69.3 million in the nine-month period ended December 23, 2022, consisting of purchases of property, plant and equipment of $49.6 million and payments related to the acquisition of Heyday Integrated Circuits of $19.7 million.
Financing Activities
Net cash provided by financing activities was $198.1 million in the nine-month period ended December 29, 2023, consisting of $245.5 million of borrowing of senior secured debt, 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 Polar Semiconductor, LLC (“PSL”) on our related party loan, partially offset by taxes related to the net settlement of equity awards, and payments of debt issuance costs in connection with the 2023 Revolving Credit Facility and 2023 Term Loan Facility.
Net cash used in financing activities was $16.7 million in the nine-month period ended December 23, 2022, consisting of taxes related to the net settlement of equity awards and additional funds loaned to 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 10, “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 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, 1,671 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 December 29, 2023. Based on the evaluation of our disclosure controls and procedures as of December 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, 592 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, as filed with the SEC on May 21, 2023, and as supplemented by the additional risk factors included in our Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2023, as filed with the SEC on November 6, 2023, each of which are available at www.sec.gov (http://www.sec.gov). There have been no material changes to those risk factors previously disclosed in our Annual Report, as supplemented by the risk factors included in our Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2023.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2023-12-29. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2023-09-30 to 2023-12-29 | $255.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months2023-04-01 to 2023-12-29 | $808.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months2023-09-30 to 2023-12-29 | $121.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months2023-04-01 to 2023-12-29 | $354.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months2023-09-30 to 2023-12-29 | $133.8m | us-gaap:GrossProfit |
| Gross profit | 9 months2023-04-01 to 2023-12-29 | $451.3m | us-gaap:GrossProfit |
| Research and development | 3 months2023-09-30 to 2023-12-29 | $44.4m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months2023-04-01 to 2023-12-29 | $130.8m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months2023-09-30 to 2023-12-29 | $52.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months2023-04-01 to 2023-12-29 | $140.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months2023-09-30 to 2023-12-29 | $36.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months2023-04-01 to 2023-12-29 | $180.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months2023-09-30 to 2023-12-29 | $3.9m | us-gaap:InterestExpense |
| Interest expense | 9 months2023-04-01 to 2023-12-29 | $5.4m | us-gaap:InterestExpense |
| Income tax | 3 months2023-09-30 to 2023-12-29 | $3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2023-04-01 to 2023-12-29 | $17.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2023-09-30 to 2023-12-29 | $33.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months2023-04-01 to 2023-12-29 | $159.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2023-09-30 to 2023-12-29 | $0.17 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months2023-04-01 to 2023-12-29 | $0.82 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2023-09-30 to 2023-12-29 | $0.17 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2023-04-01 to 2023-12-29 | $0.83 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2023-09-30 to 2023-12-29 | 194,570,380 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months2023-04-01 to 2023-12-29 | 194,925,040 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2023-04-01 to 2023-12-29 | $169.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months2023-04-01 to 2023-12-29 | $110.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | At period end2023-12-29 | $214.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2023-12-29 | $549.5m | us-gaap:AssetsCurrent |
| Total assets | At period end2023-12-29 | $1.57bn | us-gaap:Assets |
| Current liabilities | At period end2023-12-29 | $120.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2023-12-29 | $429.8m | us-gaap:Liabilities |
| Long-term debt | At period end2023-12-29 | $250.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | At period end2023-12-29 | $4.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | At period end2023-12-29 | $1.13bn | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0000950170-24-011712. Last ingested by Listed: Oct 31, 2026, 03:25 ET. Listed shows no prices and gives no investment advice.