ALLEGRO MICROSYSTEMS, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)
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 endedMarch 25, 2022 , filed with theSecurities and Exchange Commission ("SEC") onMay 18, 2022 (the "2022 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 2022 Annual Report and Part II. Item 1A. "Risk Factors" of this Quarterly Report. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future. We operate on a 52- or 53-week fiscal year ending on the last Friday of March. Each fiscal quarter has 13 weeks, except in a 53-week year, when the fourth fiscal quarter has 14 weeks such as in fiscal year 2023. All references to the three months endedJune 24, 2022 andJune 25, 2021 relate to the 13-week periods endedJune 24, 2022 andJune 25, 2021 , respectively. All references to "2022," "fiscal year 2022" or similar references relate to the 52-week period endedMarch 25, 2022 .
Insight
Allegro MicroSystems, Inc. , together with its consolidated subsidiaries ("AMI", "we", "us" or "our") is a leading global designer, developer, manufacturer and marketer of sensor integrated circuits ("ICs") and application-specific analog power ICs enabling the most important emerging technologies in the automotive and industrial markets. We are a leading supplier of magnetic sensor IC solutions worldwide based on market share, driven by our market leadership in automotive. We focus on providing complete IC solutions to sense, regulate and drive a variety of mechanical systems. This includes sensing the angular or linear position of a shaft or actuator, driving an electric motor or actuator, and regulating the power applied to sensing and driving circuits so they operate safely and efficiently. We are headquartered inManchester, New Hampshire and have a global footprint with 17 locations across four continents. Our portfolio includes more than 1,000 products, and we ship over one billion units annually to more than 10,000 customers worldwide. During the three months endedJune 24, 2022 andJune 25, 2021 , we generated$217.8 million and$188.1 million in total net sales, respectively, with$10.3 million and$27.7 million in net income, respectively, and$66.7 million and$53.8 million in Adjusted EBITDA in such fiscal periods, respectively. For additional information regarding Adjusted EBITDA, a non-GAAP financial measure, please refer to "Non-GAAP Financial Measures" in this document.
Recent initiatives to improve operating results
We implemented several initiatives during the fiscal year 2022 and into fiscal
year 2023 designed to improve our operating results during those fiscal years
and going forward.
We continue to implement initiatives to improve gross margins, which is
calculated as gross profit divided by total net sales. Our gross margin improved
from 50.0% in the first quarter of 2022 compared to 54.4% in the first quarter
of 2023. This gross margin improvement was a result of our operational
transformation, improved product mix of higher average selling prices ("ASPs")
on more value-added products, increased leverage of our distribution channel,
and continued efficiency and leverage on higher volumes. We expect to continue
to realize this lower level of cost of goods and improvements in operating
income for the immediate future. Additionally, we will continue to leverage our
facility to increase production where demand for our products warrants.
We have been successful in increasing our ASPs through a focus on feature-rich
products and selective price increases. Increased ASPs and manufacturing
efficiencies have allowed us to continue to improve gross margin in an
environment of limited capacity at our suppliers and rising input costs. Limited
supply and increased demand for many of our products and applications, as well
as supply chain disruptions related to the COVID-19 pandemic, have contributed
to input cost increases on the components needed to manufacture our products. We
will continue to consider opportunities for strategic price increases and
process efficiencies to offset input cost increases on the materials and
supplies that we use in production.
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With our efforts to leverage our fixed cost and operating margin improvements,
we have attained efficiencies through cost structure improvements, streamlining
of manufacturing and support processes, and further utilization of excess
capacity. These manufacturing efficiencies allowed us to leverage higher volumes
to keep pace with increasing demand across most of our applications, while
reducing cost of goods sold and increasing the absorption of fixed costs.
Although these initiatives have resulted in gross margin and operating income
improvements over the previous quarters, we cannot ensure that these trends will
continue over the long-term.
In May 2022 , we entered into an agreement to acquire Heyday Integrated Circuits
("Heyday"), a privately held company specializing in compact, fully integrated
isolated gate drivers that enable energy conversion in high-voltage gallium
nitride and silicon carbide wide-bandgap semiconductor designs (the "Heyday
Acquisition"). The Heyday Acquisition is expected to complement our existing
solutions for energy efficiency, including our market-leading current sensor
solutions. Additionally, it is expected to significantly expand Allegro's
addressable market for xEV, solar inverters, data center and 5G power supplies,
and broad-market industrial applications. We are currently awaiting regulatory
approval of the transaction, and we anticipate completion of the acquisition by
the third quarter of fiscal 2023.
Other Key Factors and Trends Affecting Our Results of Operations
Our financial condition and results of operations have been and will continue to be affected by many 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 months has led us to experience higher costs, including higher labor costs, wafer and other costs for materials from suppliers, and transportation 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.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 to pass through some of these higher costs to our customers; however, our ability to raise our 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 OEM customers in most of our target markets to understand their product roadmaps and strategies. For new products, the time from design initiation and manufacturing until we generate sales can be lengthy, typically between two and four years. As a result, our future sales is highly dependent on our continued success at winning design mandates from our customers. Further, despite current inflationary and pricing conditions, we expect the ASPs of our products to decline over time, and we consider design wins to be critical to our future success and anticipate being increasingly dependent on revenue from newer design wins for our newer products. The selection process is typically lengthy and may require us to incur significant design and development expenditures in pursuit of a design win with no assurance that our solutions will be selected. As a result, the loss of any key design win or any significant delay in the ramp-up of volume production of the customer's products into which our product is designed could adversely affect our business. In addition, volume production is contingent upon the successful 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, but these forecasts do not commit such
customers to minimum purchases, and customers can revise these forecasts without
penalty. In addition, as is customary in the semiconductor industry, customers
are generally permitted to cancel orders for our products within a specified
period. While historically we have permitted order cancellations for most
customers, most of our current customer order backlog is noncancellable, which
helps to mitigate our exposure to unforeseen order cancellations. However,
cancellations of orders could still result in the loss of anticipated sales
without allowing us sufficient time to reduce our inventory and operating
expenses. In addition, changes in forecasts or the timing of orders from
customers exposes us to the risks of inventory shortages or excess inventory. We
continue to see demand for our products exceed supply, and we are currently
operating in an inflationary environment.
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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 and fluctuations in product supply and demand. New technology may result in sudden changes in system designs or platform changes that may render some of our products obsolete and require us to devote significant research and development resources to compete effectively. Periods of rapid growth and capacity expansion are occasionally followed by significant market corrections in which sales decline, inventories accumulate and facilities go underutilized. During periods of expansion, our margins generally improve as fixed costs are spread over higher manufacturing volumes and unit sales. In addition, we may build inventory to meet increasing market demand for our products during these times, which serves to absorb fixed costs further and increase our gross margins. During an expansion cycle, we may increase capital spending and hiring to add to our production capacity. During periods of slower growth or industry contractions, our sales, production and productivity suffer and margins generally decline.
Components of our operating results
Net sales
Our total net sales come from product sales to direct customers and distributors. We sell products worldwide through our direct sales force, third-party and related distributors and independent sales representatives. Sales come from products for different applications. Our main applications are focused on automotive, industrial and other industries.
We sell magnetic sensor ICs, power ICs and photonics in theAmericas , EMEA andAsia . Revenue is generally recognized when control of the products is transferred to the customer, which typically occurs at a point in time upon shipment or delivery, depending on the terms of the contract. When we transact with a distributor, our contractual arrangement is with the distributor and not with the end customer. Whether we transact business with and receive the order from a distributor or directly from an end customer through our direct sales force and independent sales representatives, our revenue recognition policy and resulting pattern of revenue recognition for the order are the same. We recognize revenue net of sales returns, price protection adjustments, stock rotation rights and any other discounts or credits offered to our customers.
Cost of Goods Sold, Gross Profit and Gross Margin
Cost of goods sold consists primarily of costs of purchasing raw materials,
costs associated with probe, assembly, testing and shipping our products, costs
of personnel, including stock-based compensation, costs of equipment associated
with manufacturing, procurement, planning and management of these processes,
costs of depreciation and amortization, costs of logistics and quality
assurance, and costs of royalties, value-added taxes, utilities, repairs and
maintenance of equipment, and an allocated portion of our occupancy costs.
Gross profit is calculated as total net sales less cost of goods sold. Gross
profit is affected by numerous factors, including average selling price, revenue
mix by product, channel and customer, foreign exchange rates, seasonality,
manufacturing costs and the effective utilization of our facilities. Another
factor impacting gross profit is the time required
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for the expansion of existing facilities to reach their full production capacity. Consequently, gross profit varies from period to period and from year to year.
A significant portion of our costs is fixed, and, as a result, costs are generally difficult to adjust or may take time to adjust in response to changes in demand. In addition, our fixed costs increase as we expand our capacity. If we expand capacity faster than required by our sales growth, our gross margin could be negatively affected. Gross margin is calculated as gross profit divided by total net sales. Operating Expenses
Research and development (“R&D”) expenses
R&D expenses consist primarily of personnel-related costs of our research and development organization, including stock-based compensation, costs of development of wafers and masks, license fees for computer-aided design software, costs of development testing and evaluation, costs of developing automated test programs, equipment depreciation and related occupancy and equipment costs. While most of the costs incurred are for new product development, a significant portion of these costs is related to process technology development and proprietary package development. R&D expenses also include costs for technology development by external parties. We expect further increases in R&D expenses, in absolute dollars, as we continue the development of innovative technologies and processes for new product offerings, as well as increase the headcount of our R&D personnel in future years.
Selling, general and administrative (“SG&A”) expenses
SG&A expenses consist primarily of personnel-related costs, including stock-based compensation, and sales commissions to independent sales representatives, professional fees, including the costs of accounting, audit, legal, regulatory and tax compliance. Additionally, costs related to advertising, trade shows, corporate marketing, as well as an allocated portion of our occupancy costs, also comprise SG&A expenses.
We expect our sales and marketing expenses to increase in absolute terms as we expand our sales force and increase our sales and marketing activities.
Change in fair value of contingent consideration
The change in the fair value of the contingent consideration represents the gain recorded during the three months ended
(“Voxtel”).
Interest expense, net
Interest expense, net is comprised of interest expense from term loan debt and credit facilities we maintain with various financial institutions. Current expense is partially mitigated by income earned on our cash and cash equivalents, consisting primarily of certain investments that have contractual maturities no greater than three months at the time of purchase.
Foreign currency transaction gain (loss)
We incur transaction gains and losses resulting from intercompany transactions as well as transactions with customers or vendors denominated in currencies other than the functional currency of the legal entity in which the transaction is recorded.
(Loss) income in profit from participation
The income (loss) in equity investment profit relates to our equity investment in PSL.
Other, net
Net other items primarily consist of various income and expense items not related to our core business.
Provision for income tax
Our provision for income taxes is based on an estimate of the annual effective tax rate plus the tax impact of separate items.
We are subject to tax in theU.S. and various foreign jurisdictions. Our effective income tax rate fluctuates primarily because of: the change in the mix of ourU.S. and foreign income; the impact of discrete transactions and law changes; and the difference between the amount of tax benefits generated by the foreign derived intangible income deduction ("FDII") and 27 --------------------------------------------------------------------------------
research credits, offset by the additional tax costs associated with low-tax global intangible income and non-deductible stock-based compensation expenses.
Pursuant to impacts of 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 fifteen years, respectively ("174 Capitalization"). While it is possible thatCongress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be reversed. Although our first quarter fiscal 2023 cash from operations was not materially impacted, if legislation is not passed and made effective retroactively, we estimate the impact of this legislative change will increase our annual cash taxes by$21.0 million and produce an increased FDII effective tax rate benefit. The actual impact of 174 Capitalization on cash taxes and the effective tax rate depends on ifCongress passes additional legislation, whether such legislation is made effective retroactively, the amount of the research and development expenditures incurred by the Company during the fiscal year, and upon additional guidance the Internal Revenue Service ("IRS") may issue related to this provision. We regularly assess the likelihood of outcomes that could result from the examination of our tax returns by theIRS and other tax authorities to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our then-current expectations, charges or credits to our provision for income taxes may become necessary. Any such adjustments could have a significant effect on our results of operations.
Operating results
Three-month period ended
The following table summarizes our results of operations for the three-month periods ended
Three-Month Period Ended Change
June 24, June 25,
2022 2021 $ %
(Dollars in thousands)
Total net sales (1) $ 217,753 $ 188,142 $ 29,611 15.7 %
Cost of goods sold 99,379 93,982 5,397 5.7 %
Gross profit 118,374 94,160 24,214 25.7 %
Operating expenses:
Research and development 33,857 29,554 4,303 14.6 %
Selling, general and administrative 69,980 32,064 37,916 118.3 %
Change in fair value of contingent consideration (200) 300 (500) (166.7) %
Total operating expenses 103,637 61,918 41,719 67.4 %
Operating income 14,737 32,242 (17,505) (54.3) %
Other income (expenses), net:
Interest expense, net (120) (345) 225 (65.2) % Foreign currency transaction gain (loss) 1,924 (254) 2,178 (857.5) % (Loss) income in earnings of equity investment (864) 279 (1,143) (409.7) % Other, net (3,429) 48 (3,477) (7,243.8) % Total other expense, net (2,489) (272) (2,217) 815.1 % Income before income tax provision 12,248 31,970 (19,722) (61.7) % Income tax provision 1,965 4,263 (2,298) (53.9) % Net income 10,283 27,707 (17,424) (62.9) % Net income attributable to non-controlling interests 36 38 (2) (5.3) % Net income attributable to Allegro MicroSystems, Inc.$ 10,247 $ 27,669 $ (17,422) (63.0) % (1)Our total net sales for the periods presented above include related party net sales generated through our distribution agreement with Sanken. See our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for additional information regarding our related party net sales for the periods set forth above. 28 --------------------------------------------------------------------------------
The following table presents our results of operations as a percentage of total net sales for the periods presented.
Three-Month Period Ended
June 24, June 25,
2022 2021
Total net sales 100.0 % 100.0 %
Cost of goods sold 45.6 % 50.0 %
Gross profit 54.4 % 50.0 %
Operating expenses:
Research and development 15.5 % 15.7 %
Selling, general and administrative 32.1 % 17.0 %
Change in fair value of contingent consideration (0.1) % 0.2 %
Total operating expenses 47.5 % 32.9 %
Operating income 6.9 % 17.1 %
Other income (expenses), net:
Interest expense, net (0.1) % (0.2) % Foreign currency transaction gain (loss) 0.9 % (0.2) % (Loss) income in earnings of equity investment (0.4) % 0.1 % Other, net (1.6) % 0.1 % Total other expense, net (1.2) % (0.2) % Income before income tax provision 5.7 % 16.9 % Income tax provision 1.0 % 2.3 % Net income 4.7 % 14.6 % Net income attributable to non-controlling interests - % - % Net income attributable to Allegro MicroSystems, Inc. 4.7 % 14.6 % Total net sales Total net sales increased by$29.6 million , or 15.7%, to$217.8 million in the three-month period endedJune 24, 2022 from$188.1 million in the three-month period endedJune 25, 2021 . This increase was primarily attributable to higher shipment of our data center, advanced driver assistance systems ("ADAS"), electrified vehicle ("xEV"), and computing applications.
Sales trends by market
The following table summarizes total net sales by market. The categorization of net sales by market is based on the characteristics of the end product and the application in which our product will be designed.
Three-Month Period Ended Change
June 24, June 25,
2022 2021 Amount %
(Dollars in thousands)
Automotive $ 149,649 $ 133,523 $ 16,126 12.1 %
Industrial 40,140 30,309 9,831 32.4 %
Other 27,964 24,310 3,654 15.0 %
Total net sales $ 217,753 $ 188,142 $ 29,611 15.7 %
The increase in net sales to our end markets was driven primarily by increases
in automotive of $16.1 million , or 12.1%, industrial of $9.8 million , or 32.4%,
and other of $3.7 million , or 15.0%.
Automotive net sales increased in the three-month period ended June 24, 2022
compared to the three-month period ended June 25, 2021 , primarily due to higher
demand for our ADAS and xEV applications.
Industrial net sales increased in the three-month period ended
compared to the three-month period ended
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Other net sales improved over the three-month period ended
compared to the three-month period ended
Sales trends by product
The following table summarizes net sales by product:
Three-Month Period Ended Change
June 24, June 25,
2022 2021 Amount %
(Dollars in thousands)
Power integrated circuits ("PIC") $ 80,660 $ 66,672 $ 13,988 21.0 %
Magnetic sensors ("MS") 137,050 120,642 16,408 13.6 %
Photonics 43 828 (785) (94.8) %
Total net sales $ 217,753 $ 188,142 $ 29,611 15.7 %
The increase in net sales by product was driven by increases of $16.4 million ,
or 13.6%, in MS product sales and $14.0 million , or 21.0%, in PIC product sales,
partially offset by a decrease of $0.8 million in Photonics sales.
Sales trends by geographic location
The following table summarizes net sales by geographic location based on ship-to
location.
Three-Month Period Ended Change
June 24, June 25,
2022 2021 Amount %
(Dollars in thousands)
Americas :
United States $ 28,391 $ 26,841 $ 1,550 5.8 %
Other Americas 6,487 6,349 138 2.2 %
EMEA:
Europe 35,333 34,751 582 1.7 %
Asia:
Japan 41,709 35,453 6,256 17.6 %
Greater China 55,116 42,779 12,337 28.8 %
South Korea 20,979 21,933 (954) (4.3) %
Other Asia 29,738 20,036 9,702 48.4 %
Total net sales $ 217,753 $ 188,142 $ 29,611 15.7 %
Net sales increased across the majority of our geographic locations in the
three-month period ended June 24, 2022 compared to the three-month period ended
June 25, 2021 , primarily due to content and market share gains, as demand for
many of our products and applications continue to rise.
The increase in net sales of $12.3 million , or 28.8%, in Greater China related
to higher automotive demand, primarily in our ADAS and xEV offerings. Other Asia
experienced sales growth of $9.7 million , or 48.4%, mainly in our data center
sector. Net sales in Japan grew $6.3 million , or 17.6%, which was primarily
driven by higher demand for our safety, comfort and convenience, xEV and
industrial applications. The increase in net sales in the United States of $1.6
million , or 5.8%, was primarily driven by content and market share gains in our
ADAS applications.
Cost of Goods Sold, Gross Profit and Gross Margin
Cost of goods sold increased by$5.4 million , or 5.7%, to$99.4 million in the three-month period endedJune 24, 2022 from$94.0 million in the three-month period endedJune 25, 2021 . The increase in cost of goods sold was primarily attributable to higher sales volume.
Gross profit increased by
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million increase in total net sales in all end markets discussed above, partially offset by the impacts on cost of goods sold discussed above.
R&D costs
R&D expenses increased by$4.3 million , or 14.6%, to$33.9 million in the three-month period endedJune 24, 2022 from$29.6 million in the three-month period endedJune 25, 2021 . This increase was primarily due to a combined$3.8 million increase in personnel costs, including variable compensation costs, and general operating expenses and higher stock-based compensation expense of$0.4 million . R&D expenses represented 15.5% of our total net sales for the three-month period endedJune 24, 2022 , a decrease from 15.7% of our total net sales for the three-month period endedJune 25, 2021 . This percentage decrease was primarily due to the growth in net sales in the three-month period endedJune 24, 2022 . SG&A expenses SG&A expenses increased by$38.0 million , or 118.3%, to$70.0 million in the three-month period endedJune 24, 2022 from$32.1 million in the three-month period endedJune 25, 2021 . This increase was primarily due to an increase of$28.6 million in stock-based compensation expense, including accelerated expense from the retirement of our former chief executive officer of approximately$26.3 million , as well as higher personnel costs, including variable compensation costs, of$4.4 million and combined costs of$1.6 million comprised of professional fees and dues and subscription costs. In addition, we recognized$3.8 million of severance and other transition costs mainly due to the combined impacts of our recent changes in leadership.
SG&A expenses represented 32.1% of our total net sales for the three-month period ended
Interest expense, net
Interest expense, net was$0.1 million in the three-month period endedJune 24, 2022 compared to$0.3 million in the three-month period endedJune 25, 2021 . The decrease in interest expense was primarily due to higher interest income received from a related party in the first quarter of 2023. The mandatory interest payments on the Term Loan Facility remained relatively consistent.
Foreign currency transaction gain (loss)
We recorded a foreign currency transaction gain of$1.9 million in the three-month period endedJune 24, 2022 compared to a loss of$0.3 million in the three-month period endedJune 25, 2021 . The foreign currency transaction gains or losses recorded in each three-month period were primarily due to the realized and unrealized gains or losses from ourUK location.
(Loss) income in profit from participation
(Loss) income in earnings of equity investment reflected losses of$0.9 million and gains of$0.3 million in the three-month period endedJune 24, 2022 andJune 25, 2021 , respectively, representing the earnings on our 30% investment in PSL. Other, net Other, net decreased by$3.5 million to a loss of more than$3.4 million in the three-month period endedJune 24, 2022 from less than$0.1 million of gains in the three-month period endedJune 25, 2021 . The decrease in the three-month period endedJune 24, 2022 was primarily due to$3.5 million of unrealized losses on marketable securities. Income tax provision Income tax expense and the effective income tax rate were$2.0 million , or 16.0%, and$4.3 million , or 13.3%, respectively, in the three-month period endedJune 24, 2022 andJune 25, 2021 , respectively. The quarter endingJune 25, 2021 effective tax rate was favorably impacted by one-time state tax refunds. Current year 174 Capitalization resulted in increasedU.S. taxable income and cash taxes; however, it also produced an additional FDII benefit of$9.0 million with offsetting inclusions from Subpart F of$2.8 million . The net current year benefits of 174 Capitalization were offset by an increase in current year non-deductible executive compensation of approximately$6.7 million .
Non-GAAP Financial Measures
In addition to the measures presented in our consolidated financial statements, we regularly review other measures,
31 -------------------------------------------------------------------------------- defined as non-GAAP financial measures by theSEC , to evaluate our business, measure our performance, identify trends, prepare financial forecasts and make strategic decisions. The key measures we consider are non-GAAP Gross Profit, non-GAAP Gross Margin, non-GAAP Operating Expenses, non-GAAP Operating Income, non-GAAP Operating Margin, non-GAAP Profit before Tax, non-GAAP Provision for Income Tax, non-GAAP Net Income, non-GAAP Net Earnings per Share, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin (collectively, the "Non-GAAP Financial Measures"). These Non-GAAP Financial Measures provide supplemental information regarding our operating performance on a non-GAAP basis that excludes certain gains, losses and charges of a non-cash nature or that occur relatively infrequently and/or that management considers to be unrelated to our core operations, and in the case of non-GAAP Provision for Income Tax, management believes that this non-GAAP measure of income taxes provides it with the ability to evaluate the non-GAAP Provision for Income Taxes across different reporting periods on a consistent basis, independent of special items and discrete items, which may vary in size and frequency. By presenting these Non-GAAP Financial Measures, we provide a basis for comparison of our business operations between periods by excluding items that we do not believe are indicative of our core operating performance, and we believe that investors' understanding of our performance is enhanced by our presenting these Non-GAAP Financial Measures, as they provide a reasonable basis for comparing our ongoing results of operations. Management believes that tracking and presenting these Non-GAAP Financial Measures provides management and the investment community with valuable insight into matters such as: our ongoing core operations; our ability to generate cash to service our debt and fund our operations; and the underlying business trends that are affecting our performance. These Non-GAAP Financial Measures are used by both management and our board of directors, together with the comparable GAAP information, in evaluating our current performance and planning our future business activities. In particular, management finds it useful to exclude non-cash charges in order to better correlate our operating activities with our ability to generate cash from operations and to exclude certain cash charges as a means of more accurately predicting our liquidity requirements. We believe that these Non-GAAP Financial Measures, when used in conjunction with our GAAP financial information, also allow investors to better evaluate our financial performance in comparison to other periods and to other companies in our industry.
These non-GAAP financial measures have significant limitations as analytical tools. Some of these limitations are:
•these measures do not reflect our cash expenditures, our future capital expenditure needs or our contractual commitments;
•these measures exclude certain costs that are important in analyzing our GAAP results;
•these measures do not reflect changes in or cash requirements for our working capital requirements;
•these measures do not reflect interest charges or cash requirements to service interest or principal payments on our debt;
•these measures do not reflect our tax burden or cash requirements to pay our taxes;
•although depreciation and amortization are non-cash charges, depreciated assets will often need to be replaced in the future;
•some measures do not reflect the cash requirements for these replacements; and
•Other companies in our industry may calculate these measures differently than we do, which further limits their usefulness as comparative measures.
The Non-GAAP Financial Measures are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. These Non-GAAP Financial Measures should not be considered as substitutes for GAAP financial measures such as gross profit, gross margin, net income or any other performance measures derived in accordance with GAAP. Also, in the future we may incur expenses or charges such as those being adjusted in the calculation of these Non-GAAP Financial Measures. Our presentation of these Non-GAAP Financial Measures should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items. Our prior disclosure referred to non-GAAP Gross Profit and non-GAAP Gross Margin as Adjusted Gross Profit and Adjusted Gross Margin, respectively. No changes have been made to how we calculate these measures.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
We calculate non-GAAP Gross Profit and non-GAAP Gross Margin excluding the items
below from cost of goods sold in applicable periods, and we calculate non-GAAP
Gross Margin as non-GAAP Gross Profit divided by total net sales.
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• Voxtel Inventory Depreciation – Represents the costs associated with discontinuing one of our product lines manufactured by Voxtel.
•Stock-based compensation-Represents non-cash expenses arising from the grant of stock-based awards. A significant portion of the cost included in fiscal year 2023 related to retirement of our former CEO. •AMTC Facility consolidation one-time costs-Represents one-time costs incurred in connection with closing of the AMTC Facility and transitioning of test and assembly functions to the AMPI Facility announced in fiscal year 2020, consisting of: moving equipment between facilities, contract terminations and other non-recurring charges. The closure and transition of the AMTC Facility was substantially completed as of the end ofMarch 2021 , and we sold the AMTC Facility inAugust 2021 . •Amortization of acquisition-related intangible assets-Represents non-cash expenses associated with the amortization of intangible assets in connection with the acquisition of Voxtel, which closed inAugust 2020 . •COVID-19 related expenses-Represents expenses attributable to the COVID-19 pandemic primarily related to increased purchases of masks, gloves and other protective materials, and overtime premium compensation paid for maintaining 24-hour service at the AMPI Facility through fiscal year 2022.
Non-GAAP Operating Expenses, Non-GAAP Operating Income and Non-GAAP Operating Margin
We calculate non-GAAP Operating Expenses and non-GAAP Operating Income excluding the same items excluded above to the extent they are classified as operating expenses, and also excluding the items below in applicable periods. We calculate non-GAAP Operating Margin as non-GAAP Operating Income divided by total net sales. •Transaction fees-Represents transaction-related legal and consulting fees incurred primarily in connection with (i) one-time transaction-related legal, consulting and registration fees related to a secondary offering on behalf of certain stockholders in fiscal 2022 and (ii) one-time transaction-related legal and consulting fees in fiscal 2023 and 2022 not related to (i). •Severance-Represents (i) severance costs associated with the closing of the AMTC Facility and the transitioning of test and assembly functions to the AMPI Facility announced and initiated in fiscal year 2020, (ii) severance costs related to the discontinuation of one of our product lines manufactured by Voxtel in fiscal year 2022, and (iii) nonrecurring separation costs related to the departures of executive officers in fiscal years 2023 and 2022. •Change in fair value of contingent consideration-Represents the change in fair value of contingent consideration payable in connection with the acquisition of Voxtel.
EBITDA, Adjusted EBITDA and Adjusted EBITDA margin
We calculate EBITDA as net income minus interest income (expense), tax provision (benefit), and depreciation and amortization expenses. We calculate Adjusted EBITDA as EBITDA excluding the same items excluded above and also excluding the items below in applicable periods. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by total net sales.
• Non-core loss (gain) on sale of equipment – Represents miscellaneous non-core losses and gains on the sale of equipment.
•Foreign currency translation (gain) loss-Represents losses and gains resulting from the remeasurement and settlement of intercompany debt and operational transactions, as well as transactions with external customers or vendors denominated in currencies other than the functional currency of the legal entity in which the transaction is recorded.
• (Loss) Income in Equity Earnings – Represents our equity method investment in PSL.
• Unrealized Loss on Investments – Represents adjustments to the market value of equity investments whose fair value is readily determinable.
Non-GAAP earnings before tax, non-GAAP net income, and non-GAAP basic and diluted earnings per share
We calculate non-GAAP Profit before Tax as Income before Income Taxes excluding
the same items excluded above. We calculate non-GAAP Net Income as Net Income
excluding the same items excluded above and also excluding the item below in
applicable periods.
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Non-GAAP provision for income tax
In calculating the non-GAAP income tax provision, we have added the following items to the GAAP income tax provision:
• Tax effect of adjustments to GAAP earnings – Represents the estimated tax impact of the adjustments to non-GAAP pre-tax earnings described above and the elimination of discrete tax adjustments.
Three-Month Period Ended
June 24, March 25, June 25,
2022 2022 2021
(Dollars in thousands)
Reconciliation of Non-GAAP Gross Profit
GAAP Gross Profit $ 118,374 $ 109,603 $ 94,160
Voxtel inventory impairment - - 2,835
Stock-based compensation 832 1,184 528
AMTC Facility consolidation one-time costs - - 137
Amortization of acquisition-related intangible assets 273 273 273
COVID-19 related expenses - 296 343
Total Non-GAAP Adjustments $ 1,105 $ 1,753 $ 4,116
Non-GAAP Gross Profit $ 119,479 $ 111,356 $ 98,276
Non-GAAP Gross Margin 54.9% 55.6% 52.2%
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Three-Month Period Ended
June 24, March 25, June 25,
2022 2022 2021
(Dollars in thousands)
Reconciliation of Non-GAAP Operating Expenses
GAAP Operating Expenses $ 103,637 $
79,354
Research and Development Expenses GAAP Research and Development Expenses 33,857 32,432 29,554 Stock-based compensation 1,128 1,119 752 AMTC Facility consolidation one-time costs - - 2 COVID-19 related expenses - 3 6 Transaction fees 202 5 - Non-GAAP Research and Development Expenses 32,527
31,305 28,794
Selling, General and Administrative Expenses GAAP Selling, General and Administrative Expenses 69,980 46,822 32,064 Stock-based compensation 32,176 12,598 3,551 AMTC Facility consolidation one-time costs 96 74 324 Amortization of acquisition-related intangible assets 22 22 29 COVID-19 related expenses - 215 381 Transaction fees 1,597 384 23 Severance 4,186 - 168
Non-GAAP selling, general and administrative expenses 31,903
33,529 27,588
Change in fair value of contingent consideration (200) 100 300 Total Non-GAAP Adjustments 39,207 14,520 5,536 Non-GAAP Operating Expenses$ 64,430 $ 64,834 $ 56,382 35
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Three-Month Period Ended
June 24, March 25, June 25,
2022 2022 2021
(Dollars in thousands)
Reconciliation of Non-GAAP Operating Income
GAAP Operating Income $ 14,737 $ 30,249 $ 32,242
Voxtel inventory impairment - - 2,835
Stock-based compensation 34,136 14,901 4,831
AMTC Facility consolidation one-time costs 96 74 463
Amortization of acquisition-related intangible assets 295 295 302
COVID-19 related expenses - 514 730
Change in fair value of contingent consideration (200) 100 300
Transaction fees 1,799 389 23
Severance 4,186 - 168
Total Non-GAAP Adjustments $ 40,312 $ 16,273 $ 9,652
Non-GAAP Operating Income $ 55,049 $ 46,522 $ 41,894
Non-GAAP Operating Margin (% of net sales) 25.3% 23.2% 22.3%
Three-Month Period Ended
June 24, March 25, June 25,
2022 2022 2021
(Dollars in thousands)
Reconciliation of EBITDA and Adjusted EBITDA
GAAP Net Income $ 10,283 $ 25,652 $ 27,707
Interest expense (income), net 120 (707) 345
Income tax provision 1,965 4,504 4,263
Depreciation & amortization 11,918 12,006 12,172
EBITDA $ 24,286 $ 41,455 $ 44,487
Non-core (gain) loss on sale of equipment (3) 1 (35)
Voxtel inventory impairment - - 2,835
Foreign currency translation (gain) loss (1,924) 513 254
Loss (income) in earnings of equity investment 864 (215) (279)
Unrealized loss on investments 3,486 760 -
Stock-based compensation 34,136 14,901 4,831
AMTC Facility consolidation one-time costs 96 74 463
COVID-19 related expenses - 514 730
Change in fair value of contingent consideration (200) 100 300
Transaction fees 1,799 389 23
Severance 4,186 - 168
Adjusted EBITDA $ 66,726 $ 58,492 $ 53,777
Adjusted EBITDA Margin (% of net sales) 30.6% 29.2% 28.6%
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Three-Month Period Ended
June 24, March 25, June 25,
2022 2022 2021
(Dollars in thousands)
Reconciliation of Non-GAAP Profit before Tax
GAAP Income before Tax Provision $ 12,248
Non-core (gain) loss on sale of equipment (3) 1 (35) Voxtel inventory impairment - - 2,835 Foreign currency translation (gain) loss (1,924) 513 254 Loss (income) in earnings of equity investment 864 (215) (279) Unrealized loss on investments 3,486 760 - Stock-based compensation 34,136 14,901 4,831 AMTC Facility consolidation one-time costs 96 74 463 Amortization of acquisition-related intangible assets 295 295 302 COVID-19 related expenses - 514 730 Change in fair value of contingent consideration (200) 100 300 Transaction fees 1,799 389 23 Severance 4,186 - 168 Total Non-GAAP Adjustments$ 42,735 $ 17,332 $ 9,592 Non-GAAP Profit before Tax$ 54,983 $ 47,488 $ 41,562 Three-Month Period Ended June 24, March 25, June 25, 2022 2022 2021 (Dollars in thousands)
Reconciliation of non-GAAP provision for income taxes
GAAP Income Tax Provision $ 1,965 $ 4,504 $ 4,263
GAAP effective tax rate 16.0% 14.9% 13.3%
Tax effect of adjustments to GAAP results 5,900 2,817 2,091
Non-GAAP Provision for Income Taxes $ 7,865 $ 7,321 $ 6,354
Non-GAAP effective tax rate 14.3% 15.4% 15.3%
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Three-Month Period Ended
June 24, March 25, June 25,
2022 2022 2021
(Dollars in thousands)
Reconciliation of non-GAAP net income
GAAP Net Income $
10,283
GAAP basic earnings per share
$
$0.05 0.14
Diluted earnings per share under GAAP
$
$0.05 0.13
Non-core (gain) loss on sale of equipment (3) 1 (35) Voxtel inventory impairment - - 2,835 Foreign currency translation (gain) loss (1,924) 513 254 Loss (income) in earnings of equity investment 864 (215) (279) Unrealized loss on investments 3,486 760 - Stock-based compensation 34,136 14,901 4,831 AMTC Facility consolidation one-time costs 96 74 463 Amortization of acquisition-related intangible assets 295 295 302 COVID-19 related expenses - 514 730 Change in fair value of contingent consideration (200) 100 300 Transaction fees 1,799 389 23 Severance 4,186 - 168 Tax effect of adjustments to GAAP results (5,900) (2,817) (2,091) Non-GAAP Net Income $
47 118
Basic weighted average common stock
190,638,135 189,997,738 189,585,381 Diluted weighted average common shares 192,406,276 192,125,252 191,163,074 Non-GAAP Basic Earnings per Share $
$0.25 0.21
Non-GAAP diluted earnings per share
$
$0.24 0.21
Cash and capital resources
As ofJune 24, 2022 , we had$286.6 million of cash and cash equivalents and$417.2 million of working capital compared to$282.4 million of cash and cash equivalents and$407.5 million of working capital as ofMarch 25, 2022 . Working capital is impacted by the timing and extent of our business needs. Our primary requirements for liquidity and capital are working capital, capital expenditures, principal and interest payments on our outstanding debt and other general corporate needs. Historically, these cash requirements have been met through cash provided by operating activities and cash and cash equivalents. Our current capital deployment strategy for 2023 is to invest excess cash on hand to support our continued growth initiatives into select markets, planned capital expenditures and strategic arrangements, as well as consider potential acquisitions. As ofJune 24, 2022 , the Company is not party to any off-balance sheet arrangements that have 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 upcoming fiscal year relate to our operating leases, operating and capital purchase commitments and expected contributions to our defined benefit and contribution plans. For information regarding the Company's expected cash requirements and timing of payments related to leases and noncancellable purchase commitments, see Note 17, "Commitments and Contingencies" to the Company's 2022 Annual Report. Additionally, refer to Note 16, "Retirement Plans" to the Company's 2022 Annual Report for more information related to the Company's pension and defined contribution plans. 38 -------------------------------------------------------------------------------- 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 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 flow from operating, investing and financing activities
The following table summarizes our cash flows for the three months ended
Three-Month Period Ended
June 24, 2022 June 25, 2021
(dollars in thousands)
Net cash provided by operating activities $ 36,553 $ 38,495
Net cash used in investing activities (14,389) (15,346)
Net cash used in financing activities (9,137) -
Effect of changes in exchange rates on cash and cash equivalents (6,554)
2,608
Net increase in cash and cash equivalents and restricted cash
$ 25,757 Operating Activities Net cash provided by operating activities was$36.6 million in the three months endedJune 24, 2022 , resulting primarily from our net income of$10.3 million and noncash charges of$44.2 million , partially offset by a net decrease in operating assets and liabilities of$17.9 million . Net changes in operating assets and liabilities consisted of a$13.1 million increase in prepaid expenses, a$4.9 million increase in inventories, a$4.7 million increase in trade accounts receivable, net, and a$3.3 million decrease in net amounts due from related parties, partially offset by a$1.2 million increase in accrued expenses and other current and long-term liabilities, a$4.1 million increase in trade accounts payable and a$2.7 million decrease in other accounts receivable. The increase in prepaid expenses and other assets was primarily due to higher long-term deposits and the timing of tax payments, including value-added taxes receivable, insurance and contract costs. The increase in inventories was primarily the result of inventory builds to support anticipated sales growth in fiscal 2023. The increase in trade accounts receivable, net was primarily a result of increased sales year-over-year, as well as the timing of receipts from customers. The decrease in net amounts due to related parties was primarily due to variations in the timing of such payments in the ordinary course of business. The increase in accrued expenses and other current and long-term liabilities was primarily the result of higher accrued income taxes and accrued personnel costs, partially offset by higher management incentive payments. Accounts payable increased mainly due to the timing of payments to suppliers and vendors, partially offset by higher operating purchases, including unpaid capital expenditures of$2.6 million . The decrease in accounts receivable - other was primarily due to increased distributor sales year-over-year, as well as the timing of receipts from Sanken. Net cash provided by operating activities was$38.5 million in the three months endedJune 25, 2021 , resulting primarily from our net income of$27.7 million and noncash charges of$17.5 million , partially offset by a net decrease in operating assets and liabilities of$6.7 million . Net changes in operating assets and liabilities consisted of a$10.0 million increase in trade accounts receivable, net, a$2.4 million decrease in accrued expenses and other current and long-term liabilities and a$3.0 million decrease in trade accounts payable, partially offset by a$5.1 million decrease in inventories, a$1.7 million decrease in prepaid expenses, and a$1.9 million increase in net amounts due from related parties. The increase in trade accounts receivable, net was primarily a result of increased sales year-over-year, as well as the timing of receipts from customers. The decrease in accrued expenses and other current and long-term liabilities was primarily the result of management incentive payments, partially offset by higher accrued personnel costs. Accounts payable decreased mainly due to the timing of payments to suppliers and vendors, partially offset by higher operating purchases, including unpaid capital expenditures of$5.5 million . The decrease in inventories was primarily a result of the continued drawdown after building inventory up in prior periods to support anticipated sales growth and recovery from the COVID-19 pandemic. The decrease in prepaid expenses and other assets was primarily due to the timing of tax payments, including value-added taxes receivable, 39 -------------------------------------------------------------------------------- insurance and contract costs. 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. Investing Activities
Net cash used in investing activities consists primarily of purchases of property, plant and equipment, partially offset by proceeds from the sale of property, plant and equipment.
Net cash used in investing activities was
Net cash used in investing activities was
Fundraising activities
Net cash used in financing activities was$9.1 million in the three months endedJune 24, 2022 , consisting of taxes related to the net settlement of equity awards, partially offset by proceeds received related to the quarterly payment from PSL on our related party loan.
No net cash was used for financing activities during the three months ended
Debt Obligations OnSeptember 30, 2020 , we entered into a term loan credit agreement with Credit Suisse AG,Cayman Islands Branch, as administrative agent and collateral agent, and the other agents, arrangers and lenders party thereto, providing for a$325.0 million senior secured term loan facility due in 2027 (the "Term Loan Facility"). OnSeptember 30, 2020 , we also entered into a revolving facility credit agreement withMizuho Bank, Ltd. , as administrative agent and collateral agent, and the other agents, arrangers and lenders party thereto, providing for a$50.0 million senior secured revolving credit facility expiring in 2023 (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Senior Secured Credit Facilities"). As ofJune 24, 2022 , we had$25.0 million in aggregate principal amount of debt outstanding under our Senior Secured Credit Facilities. There were no material changes in our debt obligations from those disclosed in our 2022 Annual Report.
AMPI credit facilities
See Note 10, “Debt and Other Borrowings” for more information on line of credit arrangements in our Philippines site.
Recent accounting pronouncements
See Note 2, "Summary of Significant Accounting Policies" in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for a full description of recent accounting pronouncements, including the respective dates of adoption or expected adoption and effects on our condensed consolidated financial statements contained in Item 1 of this Quarterly Report.
Critical accounting estimates
The preparation of financial statements in conformity withU.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 2022 Annual Report. There have been no material changes in our critical accounting policies and estimates sinceMarch 25, 2022 .
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