Allegro MicroSystems(ALGM) - 2025 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for Allegro MicroSystems, Inc Item 1. Condensed Consolidated Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, changes in equity, and cash flows, with detailed notes on accounting policies, revenue, and asset/liability changes Condensed Consolidated Balance Sheets Provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific dates Condensed Consolidated Balance Sheets (in millions) | Metric | September 27, 2024 | March 29, 2024 | | :-------------------------- | :----------------- | :------------- | | Total Assets | $1,492.1 | $1,530.6 | | Total Current Assets | $523.6 | $572.2 | | Cash and Cash Equivalents | $188.8 | $212.1 | | Trade Accounts Receivable, net | $77.0 | $118.5 | | Inventories | $176.6 | $162.3 | | Total Liabilities | $553.4 | $398.9 | | Total Current Liabilities | $124.0 | $117.9 | | Long-term Debt | $396.1 | $249.6 | | Total Stockholders' Equity | $938.7 | $1,131.7 | Condensed Consolidated Statements of Operations Presents the company's financial performance over specific periods, including net sales, gross profit, operating income, and net income Condensed Consolidated Statements of Operations (in millions, except per share amounts) | Metric | 3-Month Ended Sep 27, 2024 | 3-Month Ended Sep 29, 2023 | 6-Month Ended Sep 27, 2024 | 6-Month Ended Sep 29, 2023 | | :-------------------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Total Net Sales | $187.4 | $275.5 | $354.3 | $553.8 | | Gross Profit | $85.7 | $159.5 | $160.4 | $317.5 | | Operating Income (Loss) | $4.1 | $72.9 | $(6.6) | $143.7 | | Net (Loss) Income | $(33.6) | $65.7 | $(51.2) | $126.6 | | Net (Loss) Income Attributable to Allegro MicroSystems, Inc. | $(33.7) | $65.6 | $(51.4) | $126.5 | | Basic EPS | $(0.18) | $0.34 | $(0.27) | $0.66 | | Diluted EPS | $(0.18) | $0.34 | $(0.27) | $0.65 | Condensed Consolidated Statements of Comprehensive (Loss) Income Details the components of comprehensive income, including net income and other comprehensive income items Condensed Consolidated Statements of Comprehensive (Loss) Income (in millions) | Metric | 3-Month Ended Sep 27, 2024 | 3-Month Ended Sep 29, 2023 | 6-Month Ended Sep 27, 2024 | 6-Month Ended Sep 29, 2023 | | :-------------------------------------------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Net (Loss) Income | $(33.6) | $65.7 | $(51.2) | $126.6 | | Foreign currency translation adjustment, net of tax | $5.4 | $(4.3) | $2.2 | $(4.8) | | Comprehensive (Loss) Income | $(28.2) | $61.3 | $(49.1) | $121.7 | | Comprehensive (Loss) Income Attributable to Allegro MicroSystems, Inc. | $(28.3) | $61.3 | $(49.1) | $121.7 | Condensed Consolidated Statements of Changes in Equity Outlines the changes in stockholders' equity over specific periods, reflecting net income, stock transactions, and other adjustments Condensed Consolidated Statements of Changes in Equity (in millions) | Metric | Balance at March 29, 2024 | Net Loss (6-month) | ESPP Issuances | Stock-based Compensation | Common Stock Issuance | Common Stock Repurchases | Tax Payments on Equity Awards | FX Translation Adjustment | Balance at Sep 27, 2024 | | :-------------------------------- | :------------------------ | :----------------- | :------------- | :----------------------- | :-------------------- | :----------------------- | :---------------------------- | :------------------------ | :------------------------ | | Common Stock Amount | $1.9 | — | $0.001 | $0.007 | $0.288 | $(0.388) | — | — | $1.8 | | Additional Paid-In Capital | $694.3 | — | $2.0 | $21.6 | $665.6 | $(377.2) | $(12.3) | — | $994.0 | | (Accumulated Deficit) Retained Earnings | $463.0 | $(51.4) | — | — | — | $(443.6) | — | — | $(31.9) | | Accumulated Other Comprehensive Loss | $(28.8) | — | — | — | — | — | — | $2.3 | $(26.6) | | Total Stockholders' Equity | $1,131.7 | $(51.2) | $2.0 | $21.6 | $665.8 | $(821.2) | $(12.3) | $2.2 | $938.7 | - The company repurchased 38,767,315 shares of common stock for an aggregate consideration of $853.8 million during the six-month period ended September 27, 2024, significantly impacting equity[16][19] Condensed Consolidated Statements of Cash Flows Summarizes the cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (in millions) | Cash Flow Activity | 6-Month Ended Sep 27, 2024 | 6-Month Ended Sep 29, 2023 | Change (in millions) | | :------------------------------------------------------------------------------------------------- | :------------------------- | :------------------------- | :------------------- | | Net cash provided by operating activities | $49.7 | $96.4 | $(46.7) | | Net cash used in investing activities | $(20.9) | $(59.9) | $39.0 | | Net cash used in financing activities | $(53.3) | $(15.8) | $(37.5) | | Net (decrease) increase in cash and cash equivalents and restricted cash | $(23.1) | $19.7 | $(42.8) | Notes to Unaudited Condensed Consolidated Financial Statements Provides detailed explanations of accounting policies, revenue, fair value, assets, liabilities, debt, equity, and related party transactions, including impacts from acquisitions and financing activities 1. Nature of the Business and Basis of Presentation Describes Allegro MicroSystems' core business as a global leader in sensing and power solutions and the basis for preparing its unaudited financial statements - Allegro MicroSystems, Inc. is a global leader in designing, developing, and manufacturing sensing and power solutions for motion control and energy-efficient systems in automotive and industrial markets[22] - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and include all necessary adjustments for a fair statement of financial position, results of operations, and cash flows for the interim periods[22] - The company's second quarter of fiscal year 2025 ended September 27, 2024, and the second quarter of fiscal year 2024 ended September 29, 2023, both representing 13-week periods[23] 2. Summary of Significant Accounting Policies Outlines the key accounting policies and estimates used in preparing the financial statements, including management's judgments and recent accounting pronouncements - Management makes estimates and assumptions affecting reported amounts, including valuation of acquired intangible assets, goodwill impairment, inventory net realizable value, income taxes, and stock-based compensation[24] - No single distributor or customer accounted for 10% or more of outstanding trade accounts receivable as of September 27, 2024, or March 29, 2024. For the three- and six-month periods ended September 27, 2024, no customer accounted for 10% or more of total net sales, a change from the prior year where one distributor accounted for 11.6% and 12.0% respectively[26] - The FASB issued ASU 2023-09 (Income Taxes) and ASU 2023-07 (Segment Reporting), which will require additional disclosures but are not anticipated to have an adverse impact on financial condition or cash flows[27] 3. Revenue from Contracts with Customers Details the company's revenue recognition from customer contracts, including segmentation by market, product, and geography, and notes a prior period classification correction - An immaterial error in the classification of net sales by market (Automotive, Industrial and Other) was identified and corrected for prior periods, with no impact on total net sales or net (loss) income[29] Net Sales by Market (in millions) | Market | 3-Month Ended Sep 27, 2024 | 3-Month Ended Sep 29, 2023 | 6-Month Ended Sep 27, 2024 | 6-Month Ended Sep 29, 2023 | | :--------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Automotive | $141.9 | $197.3 | $273.1 | $382.8 | | Industrial and other | $45.5 | $78.2 | $81.2 | $171.1 | | Total Net Sales | $187.4 | $275.5 | $354.3 | $553.8 | Net Sales by Product (in millions) | Product | 3-Month Ended Sep 27, 2024 | 3-Month Ended Sep 29, 2023 | 6-Month Ended Sep 27, 2024 | 6-Month Ended Sep 29, 2023 | | :-------------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Power integrated circuits | $58.7 | $99.7 | $110.5 | $203.7 | | Magnetic sensors | $128.7 | $175.8 | $243.8 | $350.1 | | Total Net Sales | $187.4 | $275.5 | $354.3 | $553.8 | Net Sales by Geography (in millions) | Geography | 3-Month Ended Sep 27, 2024 | 3-Month Ended Sep 29, 2023 | 6-Month Ended Sep 27, 2024 | 6-Month Ended Sep 29, 2023 | | :-------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Americas | $34.2 | $57.3 | $61.7 | $114.6 | | EMEA (Europe) | $27.3 | $47.0 | $54.2 | $102.3 | | Asia | $125.9 | $171.3 | $238.4 | $336.8 | | Total Net Sales | $187.4 | $275.5 | $354.3 | $553.8 | 4. Fair Value Measurements Presents the fair value of financial assets and liabilities, categorizing them within the fair value hierarchy Fair Value of Financial Assets (in millions) | Asset | September 27, 2024 | March 29, 2024 | | :-------------------- | :----------------- | :------------- | | Cash equivalents: Money market fund | $37.0 | $36.2 | | Restricted cash: Money market fund | $10.3 | $10.0 | | Total Assets | $47.3 | $46.2 | - The fair value of the Company's debt was $399.5 million as of September 27, 2024, classified as Level 2 within the fair value hierarchy[34] 5. Trade Accounts Receivable, net Provides a breakdown of trade accounts receivable, net of provisions for credit losses and sales allowances Trade Accounts Receivable, net (in millions) | Metric | September 27, 2024 | March 29, 2024 | | :----------------------------------- | :----------------- | :------------- | | Trade accounts receivable | $118.4 | $163.5 | | Less: Provision for expected credit losses | $(0.022) | $(0.145) | | Less: Returns and sales allowances | $(41.3) | $(44.8) | | Total | $77.0 | $118.5 | 6. Inventories Details the composition of inventories, including raw materials, work in process, and finished goods, along with inventory provisions Inventories (in millions) | Category | September 27, 2024 | March 29, 2024 | | :-------------- | :----------------- | :------------- | | Raw materials | $8.5 | $9.5 | | Work in process | $118.2 | $110.2 | | Finished goods | $50.0 | $42.5 | | Total | $176.6 | $162.3 | - Inventory provisions totaled $2,110 thousand for the three-month period and $4,487 thousand for the six-month period ended September 27, 2024, compared to $4,360 thousand and $9,436 thousand for the respective prior year periods[36] 7. Property, Plant and Equipment, net Presents the net carrying amount of property, plant, and equipment, and notes changes in useful lives for depreciation calculations Property, Plant and Equipment, net (in millions) | Category | September 27, 2024 | March 29, 2024 | | :--------------------------- | :----------------- | :------------- | | Total Cost | $842.6 | $819.7 | | Less accumulated depreciation | $(517.6) | $(498.5) | | Total Net | $325.1 | $321.2 | - Effective March 30, 2024, the Company increased the useful lives of a significant portion of its machinery and equipment from seven years to ten years, decreasing depreciation expense by $4,463 thousand for the three-month period and $8,918 thousand for the six-month period ended September 27, 2024[38] 8. Goodwill and Intangible Assets Details the company's goodwill and intangible assets, including changes from acquisitions and amortization expenses Goodwill (in thousands) | Metric | Total (in thousands) | | :---------------------------- | :------------------- | | Balance at March 29, 2024 | $202,425 | | Measurement period adjustments | $378 | | Foreign currency translation | $348 | | Balance at September 27, 2024 | $203,151 | - Goodwill increased by $378 thousand due to finalization of income tax matters related to the Crocus acquisition, with the purchase price allocation still preliminary[39] Intangible Assets, net (in millions) | Description | September 27, 2024 Net Carrying Amount | March 29, 2024 Net Carrying Amount | | :----------------------------------------- | :------------------------------------- | :--------------------------------- | | Patents | $23.8 | $22.9 | | Customer relationships | $11.3 | $11.7 | | Completed technologies | $229.4 | $240.0 | | Indefinite-lived process technology and trademarks | $2.3 | $2.3 | | Trademarks and other | $0 | $0 | | Total | $266.8 | $276.9 | - Intangible assets amortization expense was $6,411 thousand for the three-month period and $12,723 thousand for the six-month period ended September 27, 2024, a significant increase from $1,510 thousand and $3,005 thousand in the prior year periods, primarily due to the Crocus acquisition[40] 9. Debt and Other Borrowings Outlines the company's debt obligations, including term loan facilities, finance lease liabilities, and recent refinancing activities Debt Obligations (in millions) | Metric | September 27, 2024 | March 29, 2024 | | :---------------------------------------------------------- | :----------------- | :------------- | | 2023 Term Loan Facility | $400.0 | $249.4 | | Unamortized debt issuance costs | $(7.0) | $(4.3) | | Finance lease liabilities | $8.5 | $8.4 | | Total debt | $401.5 | $253.5 | | Current portion of long-term debt and finance lease liabilities | $(5.5) | $(3.9) | | Total long-term debt and finance lease liabilities, less current portion | $396.1 | $249.6 | - On August 6, 2024, the Company entered into the Second Amendment, increasing the 2023 Revolving Credit Facility to $256 million and providing a new $400 million Refinanced 2023 Term Loan Facility maturing in 2030[43][45] - Proceeds were used for common stock repurchase and refinancing the previous term loan[45] - The Refinanced 2023 Term Loan Facility amortizes at 1.00% per annum and bears interest at Term SOFR plus 2.25% or a base rate plus 1.25%. A $25 million payment on October 31, 2024, eliminated future required minimum quarterly payments[45] 10. Commitments and Contingencies Addresses the company's legal proceedings and other commitments, noting no material adverse effects are currently anticipated - The Company is subject to various legal proceedings in the normal course of business but is not aware of any pending or threatened legal proceeding that could have a material adverse effect on its business, operating results, cash flows, or financial condition[46] 11. Net (Loss) Income per Share Provides the calculation of basic and diluted net (loss) income per share, including the impact of contingently issuable shares Net (Loss) Income per Share (in thousands, except per share amounts) | Metric | 3-Month Ended Sep 27, 2024 | 3-Month Ended Sep 29, 2023 | 6-Month Ended Sep 27, 2024 | 6-Month Ended Sep 29, 2023 | | :----------------------------------------------------------------------------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Net (loss) income attributable to Allegro MicroSystems, Inc. | $(33,675) | $65,617 | $(51,350) | $126,467 | | Basic weighted average shares of common stock | 189,182,850 | 192,431,094 | 191,324,281 | 192,214,210 | | Diluted weighted average shares of common stock | 189,182,850 | 195,100,855 | 191,324,281 | 195,055,495 | | Basic net (loss) income per common share | $(0.18) | $0.34 | $(0.27) | $0.66 | | Diluted net (loss) income per common share | $(0.18) | $0.34 | $(0.27) | $0.65 | - Contingently issuable shares under RSUs (1,644,248) and PSUs (607,984) were excluded from diluted EPS calculation for the three-month period ended September 27, 2024, as they would have an antidilutive effect due to the net loss[48][49] 12. Common Stock and Stock-Based Compensation Details activity related to restricted stock units (RSUs) and performance stock units (PSUs), along with associated stock-based compensation expenses Restricted Stock Unit (RSU) Activity (in thousands, except share amounts) | Metric | Shares | Weighted-Average Grant Date Fair Value | | :----------------------------------- | :---------- | :------------------------------------- | | Outstanding at March 29, 2024 | 2,215,621 | $29.82 | | Granted | 1,362,512 | $28.47 | | Issued | (866,762) | $28.98 | | Forfeited | (124,702) | $29.49 | | Outstanding at September 27, 2024 | 2,586,669 | $29.42 | - Total unrecognized compensation expense for RSUs was $62,896 thousand, expected to be recognized over 2.15 years. The total grant date fair value of RSUs vested was $25,106 thousand for the six-month period ended September 27, 2024[52] Performance Stock Unit (PSU) Activity (in thousands, except share amounts) | Metric | Shares | Weighted-Average Grant Date Fair Value | | :--------------------------------------------------------- | :---------- | :------------------------------------- | | Outstanding at March 29, 2024 | 2,429,393 | $25.64 | | Granted | 528,213 | $31.06 | | Excess shares issued due achievement of performance conditions | 12,358 | $13.94 | | Issued | (310,917) | $28.81 | | Forfeited | (65,078) | $34.06 | | Outstanding at September 27, 2024 | 2,593,969 | $26.07 | - Total compensation cost related to unvested PSUs was $22,489 thousand, expected to be recognized over 2.16 years. The total grant date fair value of PSUs vested was $8,958 thousand for the six-month period ended September 27, 2024[53] Stock-Based Compensation Expense by Category (in thousands) | Expense Category | 3-Month Ended Sep 27, 2024 | 3-Month Ended Sep 29, 2023 | 6-Month Ended Sep 27, 2024 | 6-Month Ended Sep 29, 2023 | | :---------------------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Cost of goods sold | $817 | $946 | $1,378 | $3,552 | | Research and development | $3,523 | $3,602 | $7,258 | $6,470 | | Selling, general and administrative | $7,205 | $6,329 | $13,027 | $11,897 | | Total stock-based compensation | $11,545 | $10,877 | $21,663 | $21,919 | 13. Income Taxes Presents the income tax benefit or provision and the effective tax rate, explaining the factors influencing changes Income Tax (Benefit) Provision and Effective Tax Rate (in thousands) | Metric | 3-Month Ended Sep 27, 2024 | 3-Month Ended Sep 29, 2023 | 6-Month Ended Sep 27, 2024 | 6-Month Ended Sep 29, 2023 | | :----------------------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | (Benefit) provision for income taxes | $(9,470) | $7,400 | $(8,430) | $14,615 | | Effective tax rate | 22.0% | 10.1% | 14.1% | 10.4% | - The increase in the effective tax rate for both three- and six-month periods was mainly due to a decrease in forecasted US GAAP income before taxes, less tax deductions for share-based compensation, and an increase in nondeductible expenses primarily related to the Sanken and PSL transactions[55] 14. Related Party Transactions Describes significant transactions with related parties, including a share repurchase agreement with Sanken and the PSL Transaction - On July 23, 2024, the Company entered into a Share Repurchase Agreement with Sanken Electric Co., Ltd. to repurchase 38,767,315 shares of common stock in two closings, funded by an equity offering and the Refinanced 2023 Term Loan Facility[56][58] - Sanken reimbursed expenses and paid a $35 million facilitation fee[58] - The share repurchase was accounted for as a forward repurchase contract, resulting in a $34.752 million loss on change in fair value recognized in the condensed consolidated statements of operations[58] - On September 20, 2024, the Company completed the PSL Transaction, discharging $10.350 million in PSL Promissory Notes for PSL equity interests, resulting in a net loss of $2.804 million primarily from the difference between selling price and carrying amount per share[58][59] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses Allegro MicroSystems' business, recent updates, and key factors affecting operating results, detailing financial performance, liquidity, capital resources, and cash flow activities for the periods ended September 27, 2024 Overview Provides a high-level summary of Allegro MicroSystems' business as a global leader in sensor ICs and power ICs, along with key financial highlights - Allegro MicroSystems is a global leader in sensor ICs and application-specific analog power ICs for automotive and industrial markets, shipping over 1.5 billion units annually to more than 10,000 customers[62] Key Financial Highlights (in millions) | Metric | 3-Month Ended Sep 27, 2024 | 3-Month Ended Sep 29, 2023 | 6-Month Ended Sep 27, 2024 | 6-Month Ended Sep 29, 2023 | | :-------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Total Net Sales | $187.4 | $275.5 | $354.3 | $553.8 | | Net (Loss) Income | $(33.6) | $65.7 | $(51.2) | $126.6 | Business Updates Highlights recent significant corporate actions, including share repurchases, debt refinancing, and the PSL Transaction - The Company completed a share repurchase of 38,767,315 common shares from Sanken in two closings (July 29, 2024, and August 7, 2024), funded by a $665.9 million equity offering and a portion of the Refinanced 2023 Term Loan Facility[63][64] - The 2023 Revolving Credit Facility capacity was increased to $256.0 million, and a new $400 million Refinanced 2023 Term Loan Facility was established, maturing in 2030, with proceeds used for share repurchases, refinancing, and general corporate purposes[64] - The PSL Transaction closed on September 20, 2024, involving a $175.0 million capital contribution to PSL by a subscriber and the Company discharging $10.4 million in PSL Promissory Notes for an equity interest, resulting in a $2.8 million net loss for the Company[64] Other Key Factors and Trends Affecting Our Operating Results Discusses various external and internal factors influencing Allegro's operating results, such as inflation, design wins, customer demand, manufacturing costs, and industry cyclicality Inflation Addresses the impact of increased inflation on operating costs and potential effects on gross margins and profitability - Increased inflation has led to higher labor, wafer, material, transportation, and energy costs. The Company may not be able to fully offset these increases through price adjustments or productivity initiatives, potentially impacting gross margins and profitability[66] Design Wins with New and Existing Customers Emphasizes the importance of securing new design mandates for future sales growth and mitigating average selling price declines - Future sales are highly dependent on securing new design mandates from customers, which are critical to mitigate expected declines in average selling prices (ASPs) over time[67] - The design win process is lengthy (2-4 years from initiation to sales) and requires significant R&D investment without guarantee of selection, making the loss or delay of key design wins a potential adverse factor[67] Customer Demand, Orders and Forecasts Explains how product demand is influenced by end-market conditions, seasonality, and competitive pressures, noting risks from non-binding customer forecasts - Demand for products is highly dependent on end-market conditions, subject to seasonality, cyclicality, and competitive pressures. Customer forecasts do not commit to minimum purchases and can be revised or canceled, posing risks of inventory shortages or excess[68] Manufacturing Costs and Product Mix Discusses the factors affecting gross margin, including average selling prices, product mix, material costs, and manufacturing efficiencies - Gross margin is influenced by ASPs, product mix, material costs, yields, and manufacturing efficiencies. While ASPs are expected to decline long-term, this is often offset by improvements in manufacturing yields and lower costs[69] - Gross margin fluctuates quarterly due to changes in ASPs, new product introductions, and manufacturing costs, generally decreasing with lower production volumes due to reduced absorption of fixed costs[69] Cyclical Nature of the Semiconductor Industry Highlights the inherent cyclicality of the semiconductor industry, characterized by rapid technological change and fluctuations in supply and demand - The semiconductor industry is highly cyclical, characterized by rapid technological change, obsolescence, and fluctuations in supply and demand. Periods of growth improve margins, while contractions lead to declines in sales, production, and margins[71] 2017 Tax Cuts and Jobs Act Explains the impact of the 2017 Tax Cuts and Jobs Act on R&D expenditure capitalization and amortization, affecting annual cash taxes - Beginning in fiscal year 2023, U.S. tax law requires capitalization and amortization of domestic and foreign R&D expenditures over five and 15 years, respectively, increasing annual cash taxes by approximately $5.0 million for fiscal year 2025, partially offset by a $5.5 million foreign derived intangible income benefit[72] Results of Operations Details the significant declines in net sales and profitability for the three- and six-month periods ended September 27, 2024, driven by reduced customer inventory and demand across all markets and products Three-Month Period Ended September 27, 2024 Compared to Three-Month Period Ended September 29, 2023 Net sales decreased by 32.0% to $187.4 million, resulting in a net loss of $33.7 million, driven by reduced customer inventory and lower shipments across all end markets Total net sales Reports the total net sales for the three-month period, highlighting a significant decrease due to reduced customer inventory and lower shipments Total Net Sales (3-Month Period, in millions) | Metric | Sep 27, 2024 | Sep 29, 2023 | Change Amount | Change % | | :-------------- | :----------- | :----------- | :------------ | :------- | | Total Net Sales | $187.4 | $275.5 | $(88.1) | (32.0)% | - The decrease was primarily driven by an overall reduction in customer held inventory and a corresponding decline in shipments across all end markets and applications, partially offset by an increase in smart home applications[74] Sales Trends by Market Analyzes net sales performance across automotive and industrial markets for the three-month period, noting declines due to inventory rebalancing and reduced demand Net Sales by Market (3-Month Period, in millions) | Market | Sep 27, 2024 | Sep 29, 2023 | Change Amount | Change % | | :--------------------- | :----------- | :----------- | :------------ | :------- | | Automotive | $141.9 | $197.3 | $(55.4) | (28.1)% | | Industrial and other | $45.5 | $78.2 | $(32.7) | (41.8)% | | Total Net Sales | $187.4 | $275.5 | $(88.1) | (32.0)% | - Automotive net sales decreased due to inventory rebalancing and changes in product mix. Industrial and other net sales decreased due to lower demand and distributor inventory reductions, partially offset by smart home application growth[76] Sales Trends by Product Examines net sales trends by product category (Power ICs and Magnetic Sensors) for the three-month period, showing declines driven by decreased demand Net Sales by Product (3-Month Period, in millions) | Product | Sep 27, 2024 | Sep 29, 2023 | Change Amount | Change % | | :-------------------------- | :----------- | :----------- | :------------ | :------- | | Power integrated circuits | $58.7 | $99.7 | $(41.0) | (41.2)% | | Magnetic sensors and other | $128.7 | $175.8 | $(47.1) | (26.8)% | | Total Net Sales | $187.4 | $275.5 | $(88.1) | (32.0)% | - PIC sales declined due to decreased demand for motor products. MS and other sales decreased due to lower demand for current, isolator, magnetic speed, and position sensors, partially offset by TMR solutions[78] Sales Trends by Geographic Location Reviews net sales performance across Americas, EMEA, and Asia for the three-month period, indicating widespread declines in automotive and industrial sectors Net Sales by Geography (3-Month Period, in millions) | Geography | Sep 27, 2024 | Sep 29, 2023 | Change Amount | Change % | | :-------------- | :----------- | :----------- | :------------ | :------- | | Americas | $34.2 | $57.3 | $(23.1) | (40.3)% | | EMEA (Europe) | $27.3 | $47.0 | $(19.7) | (41.9)% | | Asia | $125.9 | $171.3 | $(45.4) | (26.5)% | | Total Net Sales | $187.4 | $275.5 | $(88.1) | (32.0)% | - Americas sales decreased due to lower demand in US automotive and industrial markets. Greater China and Europe also saw declines in automotive and industrial sectors, with specific impacts on EV, ADAS, and internal combustion engine applications[80] Cost of goods sold Discusses the decrease in cost of goods sold and its increase as a percentage of net sales, influenced by reduced volume and product mix - Cost of goods sold decreased by 12.3% to $101.7 million, primarily due to reduced shipped volume and product mix changes, partially offset by increased amortization of intangible assets from the Crocus acquisition[73][81] - As a percentage of total net sales, cost of goods sold increased from 42.1% to 54.3%, mainly due to reduced production volume and product mix[81] Gross profit and gross margin Reports the significant decrease in gross profit and gross margin, primarily due to lower net sales and an unfavorable product mix - Gross profit decreased by 46.3% to $85.7 million, and gross margin declined from 57.9% to 45.7%, primarily due to the decrease in net sales and unfavorable product mix[73][82] Research and development expenses Details the slight increase in R&D expenses and its rise as a percentage of net sales, reflecting lower sales volume - R&D expenses slightly increased by 0.2% to $43.5 million, primarily due to higher R&D supplies, partially offset by R&D tax credits and reduced personnel costs[73][83] - As a percentage of total net sales, R&D expenses increased from 15.8% to 23.2%, reflecting the decline in net sales[83] Selling, general and administrative expenses Explains the decrease in SG&A expenses and its increase as a percentage of net sales, driven by lower sales - SG&A expenses decreased by 11.8% to $38.1 million, mainly due to a decrease in the annual incentive program and outside service costs, partially offset by increased personnel and severance expenses[73][84] - As a percentage of total net sales, SG&A expenses increased from 15.7% to 20.3%, driven by the decline in net sales[84] Interest expense Highlights the substantial increase in interest expense due to higher interest payments and increased outstanding debt - Interest expense significantly increased by 1,265.8% to $10.4 million, due to higher interest payments on the Refinanced 2023 Term Loan Facility and an increased total outstanding debt balance[73][85] Interest income Reports the decrease in interest income, primarily attributed to lower cash and cash equivalent balances - Interest income decreased by 50.6% to $0.4 million, primarily due to lower cash and cash equivalent balances[73][86] Loss on change in fair value of forward repurchase contract Notes the recording of a significant loss from the change in fair value of a forward repurchase contract - A loss of $34.752 million was recorded on the change in fair value of a forward repurchase contract, attributed to various settlement dates under the Share Repurchase Agreement[73][87] Other (expense) income, net Explains the shift from other income to expense, primarily due to a net loss from the PSL Closing and foreign currency impacts - Other (expense) income, net, shifted from a $0.064 million income to a $(2.465) million expense, primarily due to a $2.8 million net loss from the PSL Closing and foreign currency gains from U.S. Dollar strengthening against the Philippine Peso[73][88] Income tax (benefit) provision Details the shift from an income tax provision to a benefit, with an increased effective tax rate, influenced by decreased GAAP income and nondeductible expenses - The income tax shifted from a $7.4 million provision to a $(9.5) million benefit, with the effective tax rate increasing from 10.1% to 22.0%. This change was mainly due to decreased forecasted GAAP income before taxes and increased nondeductible expenses from the Sanken and PSL transactions[73][89] Six-Month Period Ended September 27, 2024 Compared to Six-Month Period Ended September 29, 2023 Net sales decreased by 36.0% to $354.3 million, resulting in a net loss of $51.2 million, driven by reduced customer inventory and lower shipments across all end markets Total net sales Reports the total net sales for the six-month period, highlighting a significant decrease due to reduced customer inventory and lower shipments across various applications Total Net Sales (6-Month Period, in millions) | Metric | Sep 27, 2024 | Sep 29, 2023 | Change Amount | Change % | | :-------------- | :----------- | :----------- | :------------ | :------- | | Total Net Sales | $354.3 | $553.8 | $(199.5) | (36.0)% | - The decrease was primarily driven by an overall reduction in customer held inventory and a corresponding decline in shipments across all end markets and applications, including e-Mobility, safety comfort and convenience, broad-based industrial, clean energy, automation, data center, and consumer/smart home products[91] Sales Trends by Market Analyzes net sales performance across automotive and industrial markets for the six-month period, noting declines due to inventory rebalancing and reduced demand Net Sales by Market (6-Month Period, in millions) | Market | Sep 27, 2024 | Sep 29, 2023 | Change Amount | Change % | | :--------------------- | :----------- | :----------- | :------------ | :------- | | Automotive | $273.1 | $382.8 | $(109.7) | (28.7)% | | Industrial and other | $81.2 | $171.1 | $(89.8) | (52.5)% | | Total Net Sales | $354.3 | $553.8 | $(199.5) | (36.0)% | - Automotive net sales decreased due to inventory rebalancing and product mix changes. Industrial and other net sales decreased significantly due to lower demand for broad-based industrial applications and distributor inventory reductions[92] Sales Trends by Product Examines net sales trends by product category (Power ICs and Magnetic Sensors) for the six-month period, showing declines driven by decreased demand Net Sales by Product (6-Month Period, in millions) | Product | Sep 27, 2024 | Sep 29, 2023 | Change Amount | Change % | | :-------------------------- | :----------- | :----------- | :------------ | :------- | | Power integrated circuits | $110.5 | $203.7 | $(93.2) | (45.8)% | | Magnetic sensors and other | $243.8 | $350.1 | $(106.3) | (30.4)% | | Total Net Sales | $354.3 | $553.8 | $(199.5) | (36.0)% | Sales Trends by Geographic Location Reviews net sales performance across Americas, EMEA, and Asia for the six-month period, indicating widespread declines in automotive and industrial sectors Net Sales by Geography (6-Month Period, in millions) | Geography | Sep 27, 2024 | Sep 29, 2023 | Change Amount | Change % | | :-------------- | :----------- | :----------- | :------------ | :------- | | Americas | $61.7 | $114.6 | $(52.9) | (46.2)% | | EMEA (Europe) | $54.2 | $102.3 | $(48.2) | (47.1)% | | Asia | $238.4 | $336.8 | $(98.4) | (29.2)% | | Total Net Sales | $354.3 | $553.8 | $(199.5) | (36.0)% | - Americas sales decreased due to declines in US automotive and industrial markets. Greater China sales declined in automotive and industrial markets due to distributor inventory. Europe sales declined in automotive and industrial, particularly in internal combustion engine demand. South Korea and Other Asia also saw declines, while Japan's decline was partially offset by broad-based applications and electric vehicles[94] Cost of goods sold Discusses the decrease in cost of goods sold and its increase as a percentage of net sales, influenced by reduced volume and product mix - Cost of goods sold decreased by 18.0% to $193.9 million, primarily due to reduced shipped volume and product mix changes, partially offset by increased amortization of intangible assets from the Crocus acquisition[90][95] - As a percentage of total net sales, cost of goods sold increased from 42.7% to 54.7%, mainly due to reduced production volume and product mix[95] Gross profit and gross margin Reports the significant decrease in gross profit and gross margin, primarily due to lower net sales and an unfavorable product mix - Gross profit decreased by 49.5% to $160.4 million, and gross margin declined from 57.3% to 45.3%, primarily due to the decrease in net sales and unfavorable product mix[90][96] Research and development expenses Details the increase in R&D expenses and its rise as a percentage of net sales, reflecting lower sales volume - R&D expenses increased by 2.7% to $88.7 million, primarily due to higher R&D supplies and personnel costs, partially offset by R&D tax credits[90][97] - As a percentage of total net sales, R&D expenses increased from 15.6% to 25.0%, reflecting the decline in net sales[97] Selling, general and administrative expenses Explains the decrease in SG&A expenses and its increase as a percentage of net sales, driven by lower sales - SG&A expenses decreased by 10.4% to $78.3 million, mainly due to a decrease in the annual incentive program and outside service costs, partially offset by increased personnel and severance expenses[90][98] - As a percentage of total net sales, SG&A expenses increased from 15.8% to 22.1%, driven by the decline in net sales[98] Interest expense Highlights the substantial increase in interest expense due to higher interest payments and increased outstanding debt - Interest expense significantly increased by 930.1% to $15.7 million, due to higher interest payments on the Refinanced 2023 Term Loan Facility and an increased total outstanding debt balance[90][99] Interest income Reports the decrease in interest income, primarily attributed to lower cash and cash equivalent balances - Interest income decreased by 46.0% to $0.9 million, primarily due to lower cash and cash equivalent balances[90][100] Loss on change in fair value of forward repurchase contract Notes the recording of a significant loss from the change in fair value of a forward repurchase contract - A loss of $34.752 million was recorded on the change in fair value of a forward repurchase contract, attributed to various settlement dates under the Share Repurchase Agreement[90][101] Other (expense) income, net Explains the increase in other expense, primarily due to a net loss from the PSL Closing and foreign currency impacts - Other (expense) income, net, increased by 32.9% to $(3.5) million, primarily due to a $2.8 million net loss from the PSL Closing and foreign currency losses from U.S. Dollar strengthening against the Peso[90][102] Income tax (benefit) provision Details the shift from an income tax provision to a benefit, with an increased effective tax rate, influenced by decreased GAAP income and nondeductible expenses - The income tax shifted from a $14.6 million provision to a $(8.4) million benefit, with the effective tax rate increasing from 10.4% to 14.1%. This change was mainly due to decreased forecasted GAAP income before taxes and increased nondeductible expenses from the Sanken and PSL transactions[90][103] Liquidity and Capital Resources Discusses the company's cash and working capital, primary liquidity requirements, and sources of funding, including recent debt facilities Liquidity Metrics (in millions) | Metric | September 27, 2024 | March 29, 2024 | Change (in millions) | | :------------------ | :----------------- | :------------- | :------------------- | | Cash and cash equivalents | $188.8 | $212.1 | $(23.3) | | Working capital | $399.6 | $454.3 | $(54.7) | - The Company's primary liquidity requirements include working capital, capital expenditures, debt payments, and general corporate needs, historically met by operating activities and cash on hand[104] - The Refinanced 2023 Term Loan Facility provides a new $400 million tranche of term loans[104] - Management believes existing cash will be sufficient for the next 12 months, but additional funding may be sought for future growth, potentially through equity or debt financing, which could lead to dilution or restrictive covenants[104] Cash Flows from Operating, Investing and Financing Activities Cash flows for the six-month period show decreased operating cash, reduced investing cash use, and increased financing cash use, reflecting net loss, share repurchases, and debt refinancing Operating Activities Details the decrease in net cash provided by operating activities, primarily due to a net loss, partially offset by noncash charges - Net cash provided by operating activities decreased to $49.7 million (from $96.4 million in prior year), primarily due to a net loss of $51.2 million, partially offset by noncash charges of $93.2 million (including $34.8 million loss on forward repurchase contract and $32.5 million depreciation/amortization)[105][107] - Changes in operating assets and liabilities included a $41.4 million decrease in trade accounts receivable and a $13.7 million increase in trade accounts payable, offset by an $18.8 million increase in inventories and a $16.8 million decrease in accrued expenses[107] Investing Activities Reports the decrease in net cash used in investing activities, solely attributed to purchases of property, plant, and equipment - Net cash used in investing activities decreased to $20.9 million (from $59.9 million in prior year), consisting solely of purchases of property, plant, and equipment[105][108] Financing Activities Explains the increase in net cash used in financing activities, driven by common stock repurchases and term loan payments, partially offset by stock issuance and debt proceeds - Net cash used in financing activities increased to $53.3 million (from $15.8 million in prior year), driven by $853.8 million in common stock repurchases and $50.0 million in term loan payments, partially offset by $665.9 million from common stock issuance and $193.5 million net proceeds from the Refinanced 2023 Term Loan Facility[105][109] Debt Obligations Refers to detailed information on the company's debt obligations, including credit facilities and term loans - Refer to Note 9 for detailed information regarding the Company's debt obligations, including the 2023 Revolving Credit Facility and the Refinanced 2023 Term Loan Facility[110] Recent Accounting Pronouncements Refers to a full description of recent accounting pronouncements and their expected impact on financial statements - Refer to Note 2 for a full description of recent accounting pronouncements, including ASU 2023-09 (Income Taxes) and ASU 2023-07 (Segment Reporting), and their expected impact on financial statements[110] Critical Accounting Estimates States that there have been no material changes to the company's critical accounting policies and estimates since the last annual report - There have been no material changes in the Company's critical accounting policies and estimates since March 29, 2024, as described in Note 2 of the 2024 Annual Report[111] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in exposures to market risk, including interest rate, foreign currency, and inflation, since March 29, 2024 - No material changes in exposures to market risk (interest rate, foreign currency exchange rate, inflation) since March 29, 2024[112] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of September 27, 2024, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated as effective at the reasonable assurance level as of September 27, 2024, by the CEO and CFO[114] - No material changes in internal control over financial reporting occurred during the period covered by this Quarterly Report[115] PART II. Other Information This section covers legal proceedings, risk factors, equity security sales, other information including executive compensation amendments, and a list of exhibits Item 1. Legal Proceedings The Company is not party to any material legal proceedings and is unaware of any pending actions that could materially adversely affect its business - The Company is not currently involved in any material legal proceedings and is unaware of any pending or threatened legal actions that could have a material adverse effect on its business[117] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the Annual Report on Form 10-K filed May 23, 2024 - No material changes to risk factors previously disclosed in the Annual Report on Form 10-K filed May 23, 2024[118] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report during the period - No unregistered sales of equity securities or use of proceeds to report[119] Item 5. Other Information The Company amended its CEO's employment agreement and executive equity award agreements to revise severance terms and extend the change in control protection period - On October 31, 2024, the CEO's employment agreement was amended to increase severance benefits for termination without cause or resignation for good reason outside a CIC, including 2.0 times base salary plus target annual bonus and up to 18 months of health care continuation payments[120] - The amendment also specified a 24-month CIC 'protection' period for full equity award vesting acceleration, overriding the 12-month period in existing agreements[120] - Standard executive severance agreements for new officers will provide 1.0 times base salary plus target annual bonus for termination without cause or resignation for good reason, and a Section 280G 'best net benefit' provision was added[121] - All outstanding executive RSU and PSU award agreements were amended to increase the CIC 'protection' period from 12 to 24 months for equity award vesting acceleration[123] Item 6. Exhibits Lists all exhibits filed with the Quarterly Report, including agreements for Polar Semiconductor, credit, Sanken share repurchase, executive employment, and certifications - Key exhibits include the Amended and Restated Limited Partnership Agreement of Polar Semiconductor, Amendment No. 2 to the Credit Agreement, Share Repurchase Agreement with Sanken, and the Second Amended and Restated Stockholders Agreement[125] - An amendment to the CEO's employment agreement (Exhibit 10.5) and certifications from the Principal Executive and Financial Officers (Exhibits 31.1, 31.2, 32.1, 32.2) are also filed[125] Signatures The report is duly signed on November 1, 2024, by Vineet Nargolwala, President and Chief Executive Officer, and Derek P. D'Antilio, Executive Vice President, Chief Financial Officer and Treasurer, certifying its submission - The report was signed on November 1, 2024, by Vineet Nargolwala (President and CEO) and Derek P. D'Antilio (EVP, CFO, and Treasurer)[126]