Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially and adversely from those referred to herein due to a number of factors, including, but not limited to, those described below and in Item 1A “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
OVERVIEW
We, together with our consolidated subsidiaries, are a leading developer, manufacturer and provider of analog and mixed-signal semiconductor products and solutions for numerous applications, including aerospace, automotive, broadband, cellular infrastructure, connected home, defense, entertainment and gaming, industrial, medical, smartphone, tablet, and wearables.
RESULTS OF OPERATIONS
Fiscal Years Ended September 27, 2024, September 29, 2023, and September 30, 2022
The following table sets forth the results of our operations expressed as a percentage of net revenue. See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 29, 2023, filed with the SEC on November 17, 2023, as amended by Amendment No. 1 to such Annual Report on Form 10-K, filed with the SEC on January 26, 2024 (the “2023 10-K”), for Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended September 30, 2022.
Fiscal Years Ended
September 27, 2024 September 29, 2023 September 30, 2022
Net revenue 100.0 % 100.0 % 100.0 %
Cost of goods sold 58.8 55.8 52.5
Gross profit 41.2 44.2 47.5
Operating expenses:
Research and development 15.1 12.7 11.3
Selling, general, and administrative 7.2 6.6 6.0
Amortization of intangibles — 0.7 1.8
Impairment, restructuring, and other charges 3.6 0.6 0.6
Total operating expenses 25.9 20.6 19.7
Operating income 15.3 23.6 27.8
Interest expense (0.7) (1.3) (0.9)
Other income (expense), net 0.7 0.4 —
Income before income taxes 15.2 22.6 26.9
Provision for income taxes 1.0 2.0 3.7
Net income 14.3 % 20.6 % 23.2 %
General
During the fiscal year ended September 27, 2024, the following key factors contributed to our overall results of operations, financial position, and cash flows:
• Net revenue decreased 12.5% to $4,178.0 million in fiscal 2024, as compared to $4,772.4 million in fiscal 2023, driven primarily by a decrease in demand for our mobile, analog, and mixed-signal products.
• Our ending cash, cash equivalents, and marketable securities balance increased 113.1% to $1,574.1 million in fiscal 2024, as compared to $738.5 million in fiscal 2023. The increase in cash, cash equivalents, and marketable securities during fiscal 2024, was primarily due to cash generated from operations of $1,824.7 million, partially offset by
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dividend payments of $439.1 million, repayments of debt of $300.0 million, capital expenditures of $157.0 million, and share repurchases of $77.3 million.
Net Revenue
Fiscal Years Ended
(dollars in millions) September 27, 2024 Change September 29, 2023 Change September 30, 2022
Net revenue $ 4,178.0 (12.5)% $ 4,772.4 (13.0)% $ 5,485.5
We market and sell our products indirectly through electronic components distributors and directly to OEMs of communications and electronics products, third-party original design manufacturers and contract manufacturers. We generally experience seasonal peaks during our fourth and first fiscal quarters (which correspond to the second half of the calendar year), primarily as a result of increased worldwide production of consumer electronics in anticipation of holiday sales, whereas our second and third fiscal quarters are typically lower and in line with seasonal industry trends.
The decrease in net revenue in fiscal 2024, as compared to fiscal 2023, was driven primarily by a decrease in demand for our mobile, analog, and mixed-signal products.
For information regarding net revenue by geographic region and customer concentration, see Note 14 to Item 8 of this Annual Report on Form 10-K.
Gross Profit
Fiscal Years Ended
(dollars in millions) September 27, 2024 Change September 29, 2023 Change September 30, 2022
Gross profit $ 1,720.8 (18.3)% $ 2,107.3 (19.1)% $ 2,604.3
% of net revenue 41.2 % 44.2 % 47.5 %
Gross profit represents net revenue less cost of goods sold. Our cost of goods sold consists primarily of purchased materials, labor, and overhead (including depreciation, share-based compensation expense, and amortization of acquisition intangibles) associated with product manufacturing. Erosion of average selling prices of established products is typical of the semiconductor industry. Consistent with trends in the industry, we anticipate that average selling prices for our established products will continue to decline over time. As part of our normal course of business, we intend to improve gross profit with efforts to increase unit volumes, improve manufacturing efficiencies, lower manufacturing costs of existing products, and by introducing new and higher value-added products.
The decrease in gross profit in fiscal 2024, as compared to fiscal 2023, was primarily the result of an unfavorable product mix, lower unit volumes, and lower average selling prices.
Research and Development
Fiscal Years Ended
(dollars in millions) September 27, 2024 Change September 29, 2023 Change September 30, 2022
Research and development $ 631.7 4.1% $ 606.8 (1.8)% $ 617.9
% of net revenue 15.1 % 12.7 % 11.3 %
Research and development expenses consist primarily of direct personnel costs including share-based compensation expense, costs for pre-production evaluation units and testing of new devices, non-production masks, engineering prototypes, and design tool costs.
The increase in research and development expenses in fiscal 2024, as compared to fiscal 2023, was primarily related to increases in certain headcount-related expenses and costs for engineering prototypes as a result of our increased investment in developing new technologies and products, partially offset by a decrease in share-based compensation expense and a decrease in depreciation expense as a result of extending the useful lives of certain machinery and equipment. For information regarding this change in accounting estimate, see Note 2 to Item 8 of this Annual Report on Form 10-K.
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Selling, General, and Administrative
Fiscal Years Ended
(dollars in millions) September 27, 2024 Change September 29, 2023 Change September 30, 2022
Selling, general, and administrative $ 300.8 (4.2)% $ 314.0 (4.8)% $ 329.8
% of net revenue 7.2 % 6.6 % 6.0 %
Selling, general, and administrative expenses include legal and related costs, accounting, treasury, human resources, information systems, customer service, bad debt expense, sales commissions, share-based compensation expense, advertising, marketing, costs associated with business combinations completed or contemplated during the period, and other costs.
The decrease in selling, general, and administrative expenses in fiscal 2024, as compared to fiscal 2023, was primarily related to a gain on the sale of property, plant, and equipment, a decrease in professional services costs, and a decrease in share-based compensation expense.
Amortization of Intangibles
Fiscal Years Ended
(dollars in millions) September 27, 2024 Change September 29, 2023 Change September 30, 2022
Amortization of intangibles $ 0.9 (97.3)% $ 33.2 (66.4)% $ 98.9
% of net revenue — % 0.7 % 1.8 %
The decrease in amortization expense in fiscal 2024, as compared to fiscal 2023, was primarily due to certain intangible assets that were acquired in prior fiscal years reaching the end of their useful lives.
Impairment, Restructuring, and Other Charges
Fiscal Years Ended
(dollars in millions) September 27, 2024 Change September 29, 2023 Change September 30, 2022
Impairment, restructuring, and other charges $ 150.0 430.0% $ 28.3 (7.8)% $ 30.7
% of net revenue 3.6 % 0.6 % 0.6 %
Impairment, restructuring, and other charges in fiscal 2024 were primarily due to the abandonment or delay of previously capitalized in-process research and development (“IPR&D”) projects of $147.9 million and employee severance costs.
Impairment, restructuring, and other charges in fiscal 2023 were primarily due to employee severance costs and impairment charges on divested assets.
Interest Expense
Fiscal Years Ended
(dollars in millions) September 27, 2024 Change September 29, 2023 Change September 30, 2022
Interest expense $ 30.7 (52.3)% $ 64.4 34.4% $ 47.9
% of net revenue 0.7 % 1.3 % 0.9 %
The decrease in interest expense in fiscal 2024, as compared to fiscal 2023, was due to certain debt repayments that reduced the amount of outstanding indebtedness.
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Other Income (Expense), Net
Fiscal Years Ended
(dollars in millions) September 27, 2024 Change September 29, 2023 Change September 30, 2022
Other income (expense), net $ 29.7 63.2% $ 18.2 828.0% $ (2.5)
% of net revenue 0.7 % 0.4 % — %
The increase in other income, net in fiscal 2024, as compared to fiscal 2023, was primarily due to an increase in interest income generated from cash, cash equivalents, and marketable securities.
Provision for Income Taxes
Fiscal Years Ended
(dollars in millions) September 27, 2024 Change September 29, 2023 Change September 30, 2022
Provision for income taxes $ 40.4 (57.9)% $ 96.0 (52.3)% $ 201.4
% of net revenue 1.0 % 2.0 % 3.7 %
We recorded a provision for income taxes of $40.4 million (which consisted of benefits of $41.5 million and $0.3 million related to United States federal and state income taxes, respectively, and a provision of $82.2 million related to foreign income taxes) and $96.0 million (which consisted of $62.0 million and $34.0 million related to United States and foreign income taxes, respectively) in fiscal 2024 and fiscal 2023, respectively.
The decrease in income tax expense in fiscal 2024, as compared to fiscal 2023, was primarily due to lower income from operations and a higher proportion of foreign income compared to domestic, partially offset by a decrease in the benefit from foreign-derived intangible income (“FDII”), an increase in tax expense related to a change in the reserve for uncertain tax positions, and an increase in the tax on global intangible low-taxed income (“GILTI”), net of foreign tax credits.
Future changes in tax laws could arise related to the BEPS Project of the OECD, including Pillar One and Pillar Two; the European Commission’s “state aid” investigations; enactment of a global corporate minimum tax; and other developments that could have an adverse effect on the taxation of our business, including reducing the availability of tax credits and payment of higher income taxes. Many countries have implemented laws based on Pillar Two which will be effective for us in fiscal year 2025. We continue to evaluate the impact of proposed and enacted legislative changes to our effective tax rate as new guidance becomes available.
See Note 8 to Item 8 of this Annual Report on Form 10-K for additional information regarding income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal Years Ended
(in millions) September 27, 2024 September 29, 2023 September 30, 2022
Cash and cash equivalents at beginning of period $ 718.8 $ 566.0 $ 882.9
Net cash provided by operating activities 1,824.7 1,856.4 1,424.6
Net cash used in investing activities (355.9) (224.4) (378.9)
Net cash used in financing activities (819.0) (1,479.2) (1,362.6)
Cash and cash equivalents at end of period $ 1,368.6 $ 718.8 $ 566.0
Cash provided by operating activities:
Cash provided by operating activities consists of net income for the period adjusted for certain non-cash items and changes in certain operating assets and liabilities. The $31.7 million decrease in cash provided by operating activities for fiscal 2024, as compared to fiscal 2023, was primarily related to lower net income, partially offset by favorable changes in working capital of $402.9 million, due primarily to a decrease in inventory and accounts receivable.
Cash used in investing activities:
Cash used in investing activities consists primarily of capital expenditures, cash paid to acquire intangible assets, and cash paid to purchase marketable securities, offset by cash received related to the sale or maturity of marketable securities. The
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$131.5 million increase in cash used in investing activities for fiscal 2024, as compared to fiscal 2023, was primarily related to a decrease of $207.5 million in sales of marketable securities, partially offset by a decrease of $17.9 million in purchases of marketable securities and a decrease of $53.3 million in cash used for capital expenditures.
Cash used in financing activities:
Cash used in financing activities consists primarily of proceeds and payments related to our long-term borrowings and cash transactions related to equity. The $660.2 million decrease in cash used in financing activities for fiscal 2024, as compared to fiscal 2023, was primarily related to a decrease of $600.0 million for the repayment of debt and a decrease of $98.0 million in stock repurchase activity, partially offset by an increase of $33.9 million in dividend payments.
Liquidity:
Cash, cash equivalents, and marketable securities totaled $1,574.1 million as of September 27, 2024, representing an increase of $835.6 million from September 29, 2023.
We have outstanding $500.0 million of Notes Due 2026 and $500.0 million of Notes Due 2031. During fiscal 2024, 2023, and 2022, we repaid $300.0 million, $900.0 million, and $50.0 million of outstanding borrowings, respectively. We have a Revolving Credit Agreement (the “Revolving Credit Agreement”) under which we may borrow up to $750.0 million for general corporate purposes and working capital needs of the Company and its subsidiaries. As of September 27, 2024, there were no borrowings outstanding under the revolving credit facility (the “Revolver”). The Revolving Credit Agreement expires July 26, 2026.
For a description of contractual obligations, such as taxes, leases, purchase commitments, and debt, see Note 8, Note 10, Note 11, and Note 16 to Item 8 of this Annual Report on Form 10-K, respectively.
Based on our historical results of operations, we expect that our cash, cash equivalents, and marketable securities on hand, the cash we expect to generate from operations, and funds from our Revolver, will be sufficient to fund our short-term and long-term liquidity requirements primarily arising from: research and development, capital expenditures, potential acquisitions, working capital, quarterly cash dividend payments (if such dividends are declared by the Board of Directors), outstanding commitments, and other liquidity requirements associated with existing operations. However, we cannot be certain that our cash on hand, cash generated from operations, and funds from our Revolver will be available in the future to fund all of our capital and operating requirements. In addition, any future strategic investments and significant acquisitions may require additional cash and capital resources. If we are unable to obtain sufficient cash or capital to meet our needs on a timely basis and on favorable terms, our business and operations could be materially and adversely affected.
Our invested cash balances primarily consist of highly liquid marketable securities that are available to meet near-term cash requirements including: money market funds, U.S. Treasury and government securities, corporate bonds and notes, and municipal bonds.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments in applying our most critical accounting policies that can have a significant impact on the results we report in our financial statements. The SEC has defined critical accounting estimates as those that are both most important to the portrayal of our financial condition and results and which require our most difficult, complex, or subjective judgments or estimates. Based on this definition, our most critical accounting estimates include revenue recognition, which impacts the recording of net revenue; inventory valuation, which impacts the cost of goods sold and gross margin; and income taxes, which impacts the income tax provision. These policies and significant judgments involved are discussed further below. We have other significant accounting policies that do not generally require subjective estimates or judgments or would not have a material impact on our results of operations. Our significant accounting policies are described in Note 2 to Item 8 of this Annual Report on Form 10-K.
Revenue Recognition. We recognize revenue in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 606 Revenue from Contracts with Customers net of estimated reserves . Our revenue reserves contain uncertainties because they require management to make assumptions and to apply judgment to estimate the value of future credits to customers for product returns, price protection, price adjustments, and stock rotation for products sold to certain electronic component distributors. We base these estimates on the expected value method considering all reasonably available information, including our historical experience and current expectations, and are reflected in the
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transaction price when sales are recorded. Changes in actual demand or market conditions could adversely or beneficially impact our reserve calculations.
Inventory Valuation . We value our inventory at the lower of cost or net realizable value. Reserves for excess and obsolete inventory are established on a quarterly basis and are based on a detailed analysis of aged material, salability of our inventory, market conditions, and product life cycles. Once reserves are established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory. Our reserves contain uncertainties because the calculation requires management to make assumptions and to apply judgment regarding historical experience, market conditions, and technological obsolescence. Changes in actual demand or market conditions could adversely impact our reserve calculations.
Income Taxes. The application of tax laws and regulations to calculate our tax liabilities is subject to legal and factual interpretation, judgment, and uncertainty in a multitude of jurisdictions. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations, and court rulings. We recognize potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest will be due. We record an amount as an estimate of probable additional income tax liability at the largest amount that we feel is more likely than not, based upon the technical merits of the position, to be sustained upon audit by the relevant tax authority.