What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-01 compared with 2023-07-26 · 94 added, 59 removed, 156 unchanged (50% of the section changed)

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Fiscal 2023 will have 52 weeks and fiscal 2022 had 52 weeks.

Our second quarter of fiscal 2023 ended July 1, 2023.

Our second quarter of fiscal 2022 ended July 2, 2022.

Our third quarter of fiscal 2023 ended September 30, 2023.

Our third quarter of fiscal 2022 ended October 1, 2022.

Impact of Macroeconomic Conditions

The current global economic environment is experiencing inflationary pressure, rising interest rates, and geopolitical tension.

The extent of the impact of these macroeconomic conditions on our operational and financial performance will depend on future developments, including the duration and severity of any economic downturn, the impact to the business of our suppliers or customers, and other items identified under “Risk Factors” below, all of which are uncertain and cannot be predicted.

In the third quarter, we experienced a decline in revenues, and expect a continued decline into the fourth quarter, as our customers are slowing purchases to reduce existing inventories in a softening market.

The extent of the impact of these macroeconomic conditions on our operational and financial performance will depend on future developments, including the duration and severity of any economic downturn, the impact to the business of our suppliers and/or customers, and other items identified under “Risk Factors” below, all of which are uncertain and cannot be predicted.

An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition.

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Current Period Highlights

Revenues decreased $18.3 million in the recent quarter compared to the second quarter of fiscal 2022 due to decreased revenues from our Home & Life products offset by increased revenues from our Industrial & Commercial products.

Gross profit decreased $20.1 million during the same period due to decreased gross profit from our Home & Life products offset by increased gross profit from our Industrial & Commercial products.

Gross margin decreased to 58.7% in the recent quarter compared to 62.3% in the second quarter of fiscal 2022 primarily due to variations in the price and costs of our products and variations in product mix.

Operating expenses decreased by $5.9 million in the recent quarter compared to the second quarter of fiscal 2022 due primarily to decreased new product introduction costs and amortization of intangible assets.

Operating income in the recent quarter was $17.2 million compared to $31.4 million in the second quarter of fiscal 2022.

We ended the second quarter of fiscal 2023 with $505.9 million in cash, cash equivalents and short-term investments.

Net cash used in operating activities was $15.5 million during the recent six-month period.

Accounts receivable were $98.3 million at July 1, 2023, representing 36 days sales outstanding (“DSO”).

Inventory was $145.5 million at July 1, 2023, representing 130 days of inventory (“DOI”).

During the second quarter, we paid $535.0 million in cash and issued 0.9 million shares of common stock in connection with the extinguishment of the remaining principal of our 2025 convertible senior notes.

In the second quarter of fiscal 2023, we acquired 1.3 million shares of our common stock for $183.5 million.

Revenues decreased $66.1 million in the recent quarter compared to the third quarter of fiscal 2022 due to decreased revenues from our Home & Life products and our Industrial & Commercial products.

Gross profit decreased $46.6 million during the same period due to decreased gross profit from our Home & Life products and our Industrial & Commercial products.

Gross margin decreased to 58.4% in the recent quarter compared to 61.4% in the third quarter of fiscal 2022 primarily due to variations in the price and costs of our products and variations in product mix.

Operating expenses decreased by $28.6 million in the recent quarter compared to the third quarter of fiscal 2022 due primarily to cost containment measures taken in the third quarter, including the elimination of certain bonuses and certain other variable compensation through the remainder of fiscal 2023, a reduction in the use of contract employees, and the suspension of all non-essential travel.

These cost containment measures are intended to be temporary in nature.

Operating expenses also decreased due to reduced stock-based compensation from the expense reversal to adjust the estimated levels of achievement related to unvested performance stock units.

Operating income in the recent quarter was $12.2 million compared to $30.2 million in the third quarter of fiscal 2022.

Refer to “Results of Operations” below for further discussion.

We ended the third quarter of fiscal 2023 with $417.1 million in cash, cash equivalents and short-term investments.

Net cash used in operating activities was $48.9 million during the current year nine-month period.

Accounts receivable were $102.1 million at September 30, 2023, representing 45 days sales outstanding (“DSO”).

Inventory was $167.6 million at September 30, 2023, representing 178 days of inventory (“DOI”).

During the third quarter, we repaid $35.0 million in borrowings under our revolving credit facility.

In the third quarter of fiscal 2023, we acquired 0.1 million shares of our common stock for $16.0 million.

We have continued to diversify our product portfolio and introduce new products and solutions with added functionality and integration.

In the first six months of fiscal 2023, we introduced a dual-band SoC, designed for long-range networks and protocols like Amazon Sidewalk, Wi-SUN®, and other proprietary protocols, and new integrated Bluetooth® SoC and MCU families that offer IoT device designers energy efficiency, high performance and trusted security for the smallest form factor IoT devices.

In the first nine months of fiscal 2023, we introduced a dual-band SoC, designed for long-range networks and protocols like Amazon Sidewalk, Wi-SUN®, and other proprietary protocols, and new integrated Bluetooth® SoC and MCU families that offer IoT device designers energy efficiency, high performance and trusted security for the smallest form factor IoT devices.

We plan to continue introducing products that expand the capabilities we offer in order to serve both current and emerging applications, enabling us to address new markets and expand our total available market opportunity.

During the six months ended July 1, 2023, we had no customer that represented more than 10% of our revenues.

During the nine months ended September 30, 2023, we had no customer that represented more than 10% of our revenues.

In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers.

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Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer.

Two of our distributors who sell to our customers, Arrow Electronics and Edom Technology, each represented more than 10% of our revenues during the six months ended July 1, 2023.

The percentage of our revenues derived from outside of the United States was 86% during the six months ended July 1, 2023.

Two of our distributors who sell to our customers, Arrow Electronics and Edom Technology, each represented more than 10% of our revenues during the nine months ended September 30, 2023.

The percentage of our revenues derived from outside of the United States was 87% during the nine months ended September 30, 2023.

All of our revenues to date have been denominated in U.S.

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Interest Expense.

Interest expense consists of interest on our short and long-term obligations, including our convertible senior notes and credit facility.

Interest expense on our convertible senior notes includes contractual interest, amortization of debt issuance costs, and for periods prior to fiscal 2022, amortization of the debt discount.

Interest expense consists of interest on our short and long-term obligations, including our convertible senior notes that were previously outstanding and our credit facility.

Interest expense on our convertible senior notes included contractual interest, amortization of debt issuance costs, and for periods prior to fiscal 2022, amortization of the debt discount.

Provision for Income Taxes.

Provision for income taxes includes both domestic and foreign income taxes at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits, global intangible low-taxed income and Subpart F income inclusions and other permanent differences.

Provision for income taxes includes both domestic and foreign income taxes at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits, global intangible low-taxed income, Subpart F income inclusions, and other permanent differences.

See Note 10, Income Taxes , to the Condensed Consolidated Financial Statements.

Equity-method Earnings (Loss).

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of revenues

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in millions)

Industrial & Commercial

The decrease in revenues in the recent three-month period was due to decreased revenues of $39.4 million from our Home & Life products offset in part by increased revenues of $21.1 million from our Industrial & Commercial products.

The decrease in revenues in the recent six-month period was due to decreased revenues of $50.5 million from our Home & Life products offset in part by increased revenues of $45.2 million from our Industrial & Commercial products.

Average selling prices of our products increased while unit volumes decreased in the recent three- and six-month periods.

The decrease in revenues in the recent three-month period was due to decreased revenues of $41.4 million from our Home & Life products and decreased revenues of $24.6 million from our Industrial & Commercial products.

The decrease in revenues in the recent nine-month period was due to decreased revenues of $91.9 million from our Home & Life products offset in part by increased revenues of $20.5 million from our Industrial & Commercial products.

Average selling prices of our products and unit volumes decreased in the recent three -month period, and average selling prices of our products increased while unit volumes decreased in the recent nine-month period.

The average selling prices of our products may fluctuate significantly from period to period due to changes in product mix, pricing decisions and other factors.

In general, as our products become more mature, we expect to experience decreases in average selling prices.

The overall demand environment for our customers’ products is generally weaker than previously anticipated.

Customers are also seeking to reduce inventory levels relative to amounts they held during the recent period of widespread supply chain disruptions.

As a result, the current demand environment for our products is experiencing high volatility and general weakness, with customers more frequently requesting cancellations, changes to delivery dates, and price and payment term concessions.

Faced with these conditions and related to revenue that might otherwise occur in a later period, we have offered certain customers and distributors extended payment terms with respect to a portion of our Q3 2023 revenue, and, to a lesser extent, price discounts.

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in millions)

Gross profit decreased during the recent three- and six-month periods due to a decrease in gross profit for our Home & Life product group offset by an increase in gross profit for our Industrial & Commercial product group.

Gross profit decreased during the recent three- and nine-month periods due to a decrease in gross profit for our Home & Life product group and a decrease in gross profit for our Industrial & Commercial product group, primarily as a result of the decrease in unit volumes in the periods.

Gross margin decreased primarily due to variations in the price and costs of our products and variations in product mix.

Increased product demand and production capacity constraints have increased the selling price and costs of our products, and has resulted in period-to-period fluctuations in our gross margin.

We may experience variations in the average selling prices of certain of our products.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in millions)

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Percent of revenue

The increase in research and development expense in the recent three- and six-month periods was primarily due to increases of $4.9 million and $13.2 million, respectively, for personnel-related expenses and $0.4 million and $1.4 million, respectively, for occupancy costs, offset in part by decreases of $3.1 million and $1.9 million, respectively, for new product introduction costs.

We expect that research and development expense will decrease in absolute dollars in the third quarter of fiscal 2023.

The decrease in research and development expense in the recent three-month period was primarily due to a decrease of $4.0 million for personnel-related expenses, with additional decreases of $1.0 million for amortization of intangible assets and $0.9 million for new product introduction costs, partially offset by an increase of $0.7 million in occupancy costs.

Within personnel-related costs, bonus and variable compensation decreased $8.7 million as a result of the cost containment efforts in the current period, offset in part by an increase of $3.8 million in salary expense.

The increase in research and development expense in the recent nine-month period was primarily due to an increase of $9.2 million for personnel-related expenses, with additional increases of $3.1 million for IT-related costs and $2.2 million for occupancy costs.

Within personnel-related expenses, increases of $13.8 million in salary expense, $3.2 million in stock compensation, and $4.2 million in termination benefits were partially offset by a $15.6 million decrease in bonuses and variable compensation from lower attainment and the cost containment efforts in the third quarter.

Other decreases to research and development expense in the recent

nine-month period were $3.7 million for new product introduction costs and $3.1 million for the amortization of intangible assets.

We expect that research and development expense will increase in absolute dollars in the fourth quarter of fiscal 2023.

Selling, General and Administrative

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in millions)

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Percent of revenue

The decrease in selling, general and administrative expense in the three- and six-month periods was primarily due to decreases of $4.9 million and $3.7 million, respectively, for personnel-related expenses, and $1.5 million and $4.2 million, respectively, for amortization of intangible assets.

We expect that selling, general and administrative expense will decrease in absolute dollars in the third quarter of fiscal 2023.

The decrease in selling, general and administrative expense in the three-month period was primarily due to an $18.2 million decrease in personnel-related costs, which included a $9.9 million decrease in stock compensation driven by a decline in expected achievement for certain performance-based awards, and cost containment efforts in the current period resulting in decreases of $6.1 million in certain bonuses and variable compensation, and $1.1 million in travel expenses.

Additionally outside services decreased by $3.7 million and amortization of intangible assets decreased by $0.8 million.

The decrease in selling, general and administrative expense in the nine-month period was due primarily to a $22.8 million decrease to personnel-related costs, which included a $15.0 decrease in certain bonus and variable compensation as a result of the cost containment efforts in the third quarter and a $9.5 million reduction in stock compensation driven by a decline in expected achievement for certain performance-based awards, partially offset by an increase in salary expense of $2.0 million.

Additionally, amortization of intangible assets decreased by $5.0 million and outside services decreased by $3.9 million.

We expect that selling, general and administrative expense will increase in absolute dollars in the fourth quarter of fiscal 2023.

Interest Income and Other, Net

Interest income and other, net for the three and six months ended July 1, 2023 was $7.8 million and $12.6 million, respectively, compared to $3.4 million and $4.9 million for the three and six months ended July 2, 2022, respectively.

The increase in interest income and other, net in the recent three- and six-month periods was primarily due to increased interest income earned as a result of higher market interest rates.

Interest income and other, net for the three and nine months ended September 30, 2023 was $2.9 million and $15.6 million, respectively, compared to $4.7 million and $9.6 million for the three and nine months ended October 1, 2022, respectively.

The decrease in interest income and other, net in the recent three-month period was primarily due to lower interest-bearing investment balances as a result of the sale of investments to fund the settlement of our 2025 convertible senior notes in the second quarter of fiscal 2023.

The increase in interest income and other, net in the recent nine-month period was primarily due to increased interest income earned as a result of higher market interest rates.

Interest Expense

Interest expense for the three and six months ended July 1, 2023 was $1.6 million and $3.3 million, respectively, compared to $1.7 million and $3.3 million for the three and six months ended July 2, 2022, respectively.

Interest expense for the three and nine months ended September 30, 2023 was $1.4 million and $4.6 million, respectively, compared to $1.5 million and $4.9 million for the three and nine months ended October 1, 2022, respectively.

Provision for Income Taxes

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in millions)

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Effective tax rate

The increase in the effective tax rate for the three and six months ended July 1, 2023 is primarily due to a decrease to forecasted pre-tax book income, as the impact of permanent items is greater when pre-tax book income is lower, partially offset by a discrete state return-to-provision benefit recorded in the recent quarter.

The decrease in the effective tax rate for the three months ended September 30, 2023 as compared to the prior period was primarily due to a decrease in nondeductible stock compensation and a delay in the application of unfavorable foreign tax credit Treasury regulations that was announced during the recent quarter, partially offset by the increased impact of global intangible low-taxed income relative to lower pre-tax book income.

The increase in the effective tax rate for the nine months ended September 30, 2023 as compared to the prior period was primarily due to the increased impact of global intangible low-taxed income relative to lower pre-tax book income, partially offset by discrete U.S.

federal and state return-to-provision benefits recorded in the recent nine-month period.

Equity-method Earnings (Loss)

Equity-method earnings (loss) for the three and six months ended July 1, 2023 was $(0.1) million and $(1.1) million, respectively, compared to $0.0 million and $1.2 million for the three and six months ended July 2, 2022, respectively.

Equity-method earnings (loss) for the three and nine months ended September 30, 2023 was $(0.1) million and $(1.2) million, respectively, compared to $1.8 million and $3.0 million for the three and nine months ended October 1, 2022, respectively.

Business Outlook

The following represents our business outlook for the third quarter of fiscal 2023.

The following represents our business outlook for the fourth quarter of fiscal 2023.

Income Statement Item

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Liquidity and Capital Resources

Our principal sources of liquidity as of July 1, 2023 consisted of $505.9 million in cash, cash equivalents and short-term investments, of which $241.1 million was held by our U.S.

Our principal sources of liquidity as of September 30, 2023 consisted of $417.1 million in cash, cash equivalents and short-term investments, of which $268.6 million was held by our U.S.

The remaining balance was held by our foreign subsidiaries.

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Operating Activities

Net cash used in operating activities was $15.5 million during the six months ended July 1, 2023, compared to net cash provided of $83.4 million during the six months ended July 2, 2022.

Operating cash flows during the six months ended July 1, 2023 reflect our net income of $24.9 million, adjustments of $52.4 million for depreciation, amortization, stock-based compensation, equity-method earnings (loss) and deferred income taxes, and a net cash outflow of $92.8 million due to changes in our operating assets and liabilities.

Accounts receivable increased to $98.3 million at July 1, 2023 from $71.4 million at December 31, 2022.

The increase in accounts receivable resulted primarily from normal variations in the timing of collections and billings.

Our DSO was 36 days at July 1, 2023 and 25 days at December 31, 2022.

Inventory increased to $145.5 million at July 1, 2023 from $100.4 million at December 31, 2022.

Our inventory levels will vary based on the availability of supply, and to a lesser extent, the impact of variations between forecasted demand used for purchasing inventory and actual demand.

Inventory has increased as we have invested in building inventory to minimize potential supply disruptions and meet future demand.

Our DOI was 130 days at July 1, 2023 and 90 days at December 31, 2022.

Net cash used in operating activities was $48.9 million during the nine months ended September 30, 2023, compared to net cash provided of $127.4 million during the nine months ended October 1, 2022.

Operating cash flows during the nine months ended September 30, 2023 reflect our net income of $35.3 million, adjustments of $71.6 million for depreciation, amortization, stock-based compensation, equity-method earnings (loss) and deferred income taxes, and a net cash outflow of $155.7 million due to changes in our operating assets and liabilities.

Accounts receivable increased to $102.1 million at September 30, 2023 from $71.4 million at December 31, 2022.

The increase in accounts receivable resulted primarily from variations in the timing of collections and billings, with a majority of our shipments occurring in the final month of the current quarter.

Our DSO increased to 45 days at September 30, 2023 from 25 days at December 31, 2022.

Incentives offered to customers in the third quarter of 2023 included temporarily extending payment terms in certain cases.

While the majority of these actions are intended to be temporary in nature, the continuation of these concessions may result in additional or more permanent increases to our payment terms and further increase our collection times.

Inventory increased to $167.6 million at September 30, 2023 from $100.4 million at December 31, 2022.

Our inventory levels will vary based on the availability of supply and the impact of variations between forecasted demand used for purchasing inventory and actual demand.

Inventory has increased in part due to us investing in building inventory to minimize potential supply disruptions and meet forecasted future demand.

Our DOI was 178 days at September 30, 2023 and 90 days at December 31, 2022.

Investing Activities

Net cash provided by investing activities was $416.1 million during the six months ended July 1, 2023, compared to net cash used of $27.9 million during the six months ended July 2, 2022.

The increase in cash inflows was principally due to an increase in cash inflows of $445.4 million from net purchases, sales and maturities of marketable securities in the current period.

Net cash provided by investing activities was $426.4 million during the nine months ended September 30, 2023, compared to net cash provided by $40.8 million during the nine months ended October 1, 2022.

The increase in cash inflows was principally due to cash provided by net purchases, sales and maturities of marketable securities of $445.3 million in the current period.

Financing Activities

Net cash used in financing activities was $665.7 million during the six months ended July 1, 2023, compared to net cash used of $586.7 million during the six months ended July 2, 2022.

Net cash used in financing activities was $717.5 million during the nine months ended September 30, 2023, compared to net cash used of $690.1 million during the nine months ended October 1, 2022.

The increase in cash outflows was principally due to $571.2 million in payments on debt in the current period, offset by a decrease of $464.6 million for repurchases of our common stock and $80.0 million in proceeds from our revolving line of credit in the current period.

Discontinued Operations

Net cash used in discontinued operations was zero during the six months ended July 1, 2023, compared to net cash used of $38.6 million during the six months ended July 2, 2022 related to income tax payments.

As of July 1, 2023, our debt included a $400 million revolving credit facility.

Net cash used in discontinued operations was zero during the nine months ended September 30, 2023, compared to net cash used of $69.5 million during the nine months ended October 1, 2022 related to income tax payments.

As of September 30, 2023, we had a $400 million revolving credit facility.

We have an option to increase the size of the borrowing capacity of the revolving credit facility by up to the greater of an aggregate of $250 million and 100% of EBITDA, plus an amount that would not cause a secured net leverage ratio to exceed 3.50 to 1.00, subject to certain conditions.

In June 2023, we borrowed $80 million under the revolving credit facility.

In the third quarter, we repaid $35.0 million in borrowings under our revolving credit facility.

As of September 30, 2023, the outstanding balance in the revolving credit facility is $45.0 million.

In June 2023, we paid $535.0 million in cash and issued 0.9 million shares of common stock in connection with the settlement of our 2025 convertible senior notes.

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interest rates.

A 100 basis point decline in yield on our investment portfolio holdings as of July 1, 2023 would decrease our future annual interest income by approximately $4.1 million.

A 100 basis point decline in yield on our investment portfolio holdings as of September 30, 2023 would decrease our future annual interest income by approximately $3.2 million.

We believe that our investment policy, which defines the duration, concentration, and minimum credit quality of the allowable investments, meets our investment objectives.

2 unchanged sentences

The interest rate on the credit facility consists of a variable-rate of interest and an applicable margin.

At July 1, 2023, we had $80.0 million outstanding under our credit facility.

At September 30, 2023, we had $45.0 million outstanding under our credit facility.

A 100 basis point increase in interest rates would increase our future annual interest rate expense by approximately $0.5 million.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis