MACOM Technology Solutions Holdings, Inc. (MTSI) FY 2024 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

This Management’s 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. 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.

The following section generally discusses our financial condition and results of operations for our fiscal year ended September 27, 2024 (“fiscal year 2024”) compared to our fiscal year ended September 29, 2023 (“fiscal year 2023”). A discussion regarding our financial condition and results of operations for fiscal year 2023 compared to our fiscal year ended September 30, 2022 (“fiscal year 2022”) can be found in Part II, Item 7 of our Annual Report on Form 10-K for fiscal year 2023, filed with the Securities and Exchange Commission (the “SEC”) on November 13, 2023.

OVERVIEW

We design and manufacture semiconductor products and solutions for I&D, Data Center and Telecom industries. Headquartered in Lowell, Massachusetts, we have more than 70 years of application expertise, with silicon, GaAs, GaN and InP fabrication, manufacturing, assembly and test, and operational facilities throughout North America, Europe and Asia. We design, develop and manufacture differentiated semiconductor products and solutions for customers who demand high performance, quality and reliability. We offer a broad portfolio of thousands of standard and custom devices, which include ICs, MCMs, diodes, amplifiers, switches and switch limiters, passive and active components and RF and optical subsystems, which make up dozens of product lines that service over 6,000 end customers in our three primary markets. Our semiconductor products are electronic components that our customers generally incorporate into larger electronic systems, such as wireless basestations, high-capacity optical networks, data center networks, radar, medical systems and test and measurement applications. Our primary end markets are: (1) I&D, which includes military and commercial radar, RF jammers, electronic countermeasures, communication data links, satellite communications and various wired and wireless multi-market applications, which include industrial, medical, test and measurement and scientific applications; (2) Data Center, enabled by our broad portfolio of analog ICs and photonic components for high speed connectivity customers; and (3) Telecom, which includes carrier infrastructure such as long-haul/metro, 5G and future generation infrastructure, satellite communications and FTTx/PON, among others.

See “Item 1 - Business” for additional information.

Basis of Presentation

We have one reportable operating segment and all intercompany balances have been eliminated in consolidation.

We have a 52 or 53-week fiscal year ending on the Friday closest to the last day of September. Fiscal years 2024, 2023 and 2022 each consisted of 52 weeks. To offset the effect of holidays, for fiscal years in which there are 53 weeks, we typically include the extra week in the first quarter of our fiscal year.

Description of Our Revenue

Revenue. Our revenue is derived from sales of high-performance RF, microwave, millimeter wave, optical and photonic semiconductor products. We design, integrate, manufacture and package differentiated, semiconductor-based products that we sell to customers through our direct sales organization, our network of independent sales representatives and our distributors.

We believe the primary drivers of our future revenue growth will include:

•continued growth in the demand for high-performance analog, digital and optical semiconductors in our three primary markets;

•introducing new products using advanced technologies, added features, higher levels of integration and improved performance;

•increasing content of our semiconductor solutions in customers’ systems through cross-selling our product lines;

•leveraging our core strength and leadership position in standard, catalog products that service all of our end applications; and

•engaging early with our lead customers to develop custom and standard products.

Our core strategy is to develop and innovate high-performance products that address our customers’ most difficult technical challenges in our primary markets: I&D, Data Center and Telecom.

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We expect our revenue in the I&D market to be driven by the expanding product portfolio that we offer which services applications such as test and measurement, satellite communications, civil and military radar, industrial, automotive, scientific and medical applications, further supported by growth in applications for our multi-market catalog products.

We expect our revenue in the Data Center market to be driven by the adoption of higher speed processing technologies and the upgrade of data center architectures to 100G, 200G, 400G, 800G and 1.6T interconnects, which we expect will drive adoption of higher speed optical and photonic components.

We expect our revenue in the Telecom market to be driven by 5G deployments, with continued upgrades and expansion of communications equipment, satellite communications networks and increasing adoption of our high-performance RF, millimeter wave, optical and photonic components.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. The preparation of financial statements, in conformity with U.S. generally accepted accounting principles (“GAAP”), requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the reported amounts of revenue and expenses during the reporting period and disclosure of contingent assets and liabilities at the date of the financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and could be material if our actual or expected experience were to change unexpectedly. On an ongoing basis, we re-evaluate our estimates and judgments.

We base our estimates and judgments on our historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates and material effects on our operating results and financial position may result. The accounting policies which our management believes involve the most significant application of judgment or involve complex estimation, are inventories and associated reserves; revenue reserves; business combinations; goodwill and intangible asset valuation; share-based compensation valuations and income taxes.

Inventory valuation

When we evaluate inventory for excess quantities and obsolescence, we utilize historical product usage experience and expected demand for establishing our reserve estimates. Our actual product usage may vary from the historical experience and estimating demand is inherently difficult, particularly given the cyclical nature of the semiconductor industry, both of these factors may result in us recording excess and obsolete inventory amounts that do not match the required amounts.

Revenue reserves

We establish revenue reserves, primarily for product returns, price adjustments and stock rotations for products sold. Each revenue reserve requires the use of judgment and estimates that impact the amount and timing of revenue recognition. We record reductions of revenue for such reserve adjustments, in the same period that the related revenue is recorded. The reserves are estimated based on the expected value method derived from historical data, current expectations and economic conditions, and contractual terms with customers, including distributors. The actual pricing adjustments granted may significantly exceed or be less than the historical estimates resulting in adjustments to revenue in the incorrect period.

Business Combinations

We apply significant estimates and judgments in order to determine the fair value of the identified tangible and intangible assets acquired, liabilities assumed and goodwill recognized in business combinations. The value of all assets and liabilities are recognized at fair value as of the acquisition date using a market participant approach. In measuring the fair value, we utilize a number of valuation techniques. When determining the fair value of property and equipment acquired, generally we must estimate the cost to replace the asset with a new asset taking into consideration such factors as age, condition and the economic useful life of the asset. When determining the fair value of intangible assets acquired, typically determined using a discounted cash flow valuation method, we use assumptions such as the timing and amount of future cash flows, discount rates, weighted average cost of capital and estimated useful lives. These assessments can be significantly affected by our judgments.

Goodwill and intangible asset valuation

Significant management judgment is required in our valuation of goodwill and intangible assets, many of which are based on the creation of forecasts of future operating results that are used in the valuation, including (i) estimation of future cash flows, (ii) estimation of the long-term rate of growth for our business, (iii) estimation of the useful life over which cash flows will occur, (iv) terminal values, if applicable, and (v) the determination of our weighted average cost of capital, which helps determine the discount rate. It is possible that these forecasts may change, and our performance projections included in our forecasts of future results may prove to be inaccurate. The value of our goodwill and purchased intangible assets could also be impacted by future adverse changes, such as a decline in the valuation of technology company stocks, including the valuation of our common stock, or a significant slowdown in the worldwide economy or in the semiconductor industry.

Share-based compensation expense

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We account for share-based compensation arrangements using the fair value method as described in Note 2 - Summary of Significant Accounting Policies to our Consolidated Financial Statements in this Annual Report. There are a significant number of estimates and assumptions required for the initial valuation as well as for the ongoing valuation of certain share-based compensation items. These estimates may vary significantly and the assumptions may not be accurate resulting us to make adjustments to historically recorded balances.

Income taxes

We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure together and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income within the relevant jurisdiction. To the extent we believe that recovery is not likely, we must establish a valuation allowance. We provide valuation allowances for certain deferred tax assets where it is more likely than not that any portion will not be realized.

On a periodic basis, we reassess valuation allowances on our deferred tax assets, weighing positive and negative evidence, to assess recoverability. We determined that the valuation allowance on the majority of our domestic Net Operating Losses (“NOL”) and R&D tax credit carryforwards and other deferred tax assets should be released as of September 30, 2022. In making this determination, we considered positive evidence, including significant cumulative consolidated and U.S. income over the three years ended September 30, 2022, continued revenue growth combined with profitability and expectations regarding financial forecasts. We also considered negative evidence, including the uncertainty relating to the economic and geopolitical environment and global supply chain.

Significant judgment is required in making these assessments to maintain or reverse the majority of our valuation allowances. To the extent our future expectations change, we would have to reassess the recoverability of our deferred tax assets at that time. This valuation allowance release resulted in a tax benefit of $202.8 million, or $2.91 per basic share in fiscal year 2022.

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.

Historically, we have not experienced material differences in our estimates and actual results.

For additional information related to these and other accounting policies refer to Note 2 - Summary of Significant Accounting Policies to our Consolidated Financial Statements included in this Annual Report which is incorporated by reference herein.

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RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, our Statements of Operations data (in thousands):

(1)Includes (a) amortization expense related to intangible assets arising from acquisitions and (b) share-based compensation expense included in our Consolidated Statements of Operations as set forth below (in thousands):

(2)Fiscal years 2024 and 2023 includes $7.7 million and $9.1 million, respectively, of acquisition transaction costs.

(3)Fiscal year 2022 includes a gain on sale of our equity method investment of $118.2 million and includes a non-cash net loss of $3.3 million associated with our equity method investment based on our proportionate share of its losses and changes in equity. See Note 5 - Investments to the Consolidated Financial Statements included in this Annual Report for additional information.

(4)Fiscal years 2024, 2023 and 2022 includes a non-cash benefit of $3.6 million, $12.1 million and $202.8 million, respectively, related to the partial release of our valuation allowance. See Note 20 - Income Taxes to the Consolidated Financial Statements included in this Annual Report for additional information.

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The following table sets forth, for the periods indicated, our Statements of Operations data expressed as a percentage of our revenue:

Comparison of Fiscal Year Ended September 27, 2024 to Fiscal Year Ended September 29, 2023

Revenue. In fiscal year 2024, our revenue increased by $81.2 million, or 12.5%, to $729.6 million from $648.4 million for fiscal year 2023. Fiscal years 2024 and 2023 each consisted of 52 weeks.

Revenue from our primary markets, the percentage of change between the years and revenue by primary markets expressed as a percentage of total revenue were (in thousands, except percentages):

In fiscal year 2024, our I&D market revenue increased by $34.5 million, or 10.9%, compared to fiscal year 2023. The increase was primarily driven by revenue from recent acquisitions, partially offset by lower sales of legacy products for industrial markets.

In fiscal year 2024, our Data Center market revenue increased by $50.9 million, or 34.6%, compared to fiscal year 2023. The increase was primarily driven by an increase in sales of 400G and 800G high-performance analog Data Center products, partially offset by a decrease in sales of our legacy connectivity products.

In fiscal year 2024, our Telecom market revenue decreased by $4.2 million, or 2.3%, compared to fiscal year 2023. The decrease was primarily driven by a decrease in sales in broadband access, PON, carrier-based optical semiconductor products and other telecom markets, partially offset by incremental revenue from recent acquisitions.

We continue to be negatively impacted by the current macroeconomic conditions, which we expect may result in weaker near-term demand for our products across all three of our primary markets.

Gross profit. In fiscal year 2024, our gross profit increased by $8.0 million, or 2.1%, compared to fiscal year 2023. Gross margin of 54.0% in fiscal year 2024 decreased 550 basis points, compared to fiscal year 2023. The increase in gross profit during 2024 was primarily as a result of higher sales primarily driven by recent acquisitions, partially offset by product mix, increased employee-related costs, primarily driven by headcount from acquisitions, higher intangible asset amortization and depreciation expense.

Research and development. In fiscal year 2024, research and development expense increased by $33.6 million, or 22.6%, to $182.2 million, representing 25.0% of revenue, compared with $148.5 million, representing 22.9% of revenue, in fiscal year 2023. Research and development expense increased during fiscal year 2024 primarily as a result of increases in employee-related costs, driven by higher headcount associated with acquisitions, higher intangible asset amortization and share-based compensation expense.

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Selling, general and administrative. In fiscal year 2024, selling, general and administrative expenses increased by $8.1 million, or 6.2%, to $137.9 million, or 18.9% of revenue, compared with $129.9 million, or 20.0% of revenue, for fiscal year 2023. Selling, general and administrative expenses increased during fiscal year 2024 primarily due to increases in employee-related costs, primarily driven by headcount from acquisitions, and share-based compensation, partially offset by lower professional fees and intangible amortization.

Interest income. In fiscal year 2024, interest income was $23.0 million, or 3.1% of our revenue, compared to $20.8 million of interest income, or 3.2% of our revenue, for fiscal year 2023. The change in fiscal year 2024 is primarily due to the general increase in interest rates on our short-term investments and due to the increase in our short-term investments.

Interest expense. In fiscal year 2024, interest expense was $5.1 million, or 0.7% of our revenue, compared to $12.4 million of interest expense, or 1.9% of our revenue, for fiscal year 2023. The decrease in fiscal year 2024 is primarily due to the August 2023 payment of the total outstanding principal balance of the Term Loans (as defined in Note 15 - Debt to the Consolidated Financial Statements included in this Annual Report).

Income tax expense. In fiscal year 2024, income tax expense was $14.7 million, or 2.0% of revenue, compared to an expense of $23.6 million, or 3.7% of revenue, for fiscal year 2023. The decrease in the provision is primarily due to lower Income before taxes, the Foreign-derived intangible income deduction in the fiscal year ended September 27, 2024 plus a $3.6 million partial release of the valuation allowance, primarily relating to our domestic NOL and R&D tax credit carryforwards, released in our fiscal fourth quarter of 2024.

For fiscal year 2024, our effective tax rate was 16.0%. Our effective tax rate for fiscal year 2024, as compared to the U.S. federal income tax rate of 21%, is impacted primarily by income earned outside the U.S. (i.e., global intangible low taxed income), resulting in a 12.7% increase, offset primarily by research and development credits, resulting in a 9.4% decrease, Foreign-derived intangible income deduction, resulting in a 4.5% decrease and partial release of our valuation allowance, resulting in a 4.0% decrease. See Note 20 - Income Taxes to the Consolidated Financial Statements included in this Annual Report for additional information.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes our cash flow activities for the fiscal years ended September 27, 2024 and September 29, 2023, respectively (in thousands):

Cash Flow from Operating Activities:

Our cash flow from operating activities for fiscal year 2024 was $162.6 million and consisted of a net income of $76.9 million, plus adjustments to reconcile our net income to cash provided by operating activities of $116.8 million, and cash used by operating assets and liabilities of $31.0 million. Adjustments to reconcile our net income to cash provided by operating activities of $116.8 million primarily included depreciation and intangible amortization expense of $67.2 million, share-based compensation expense of $45.6 million and deferred income tax expense of $4.9 million, partially offset by $7.6 million in amortization on marketable securities. In addition, cash used by operating assets and liabilities was $31.0 million for fiscal year 2024, primarily driven by an increase in inventory of $30.2 million, an increase in accounts receivable of $16.8 million and a decrease in accrued and other liabilities of $7.3 million, partially offset by an increase in accounts payable of $18.2 million.

Our cash flow from operating activities for fiscal year 2023 was $166.9 million and consisted of a net income of $91.6 million, plus adjustments to reconcile our net income to cash provided by operating activities of $103.1 million, and cash used by operating assets and liabilities of $27.8 million. Adjustments to reconcile our net income to cash provided by operating activities of $103.1 million primarily included depreciation and intangible amortization expense of $52.2 million, share-based compensation expense of $38.1 million and deferred income tax expense of $19.8 million, partially offset by $11.8 million in amortization on marketable securities. In addition, cash used by operating assets and liabilities was $27.8 million for fiscal year 2023, primarily driven by a decrease in accrued and other liabilities of $21.3 million, an increase in inventory of $10.6 million, a decrease in accounts payable of $6.7 million, partially offset by a decrease in accounts receivable of $12.3 million.

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Cash Flow from Investing Activities:

Our cash flow used in investing activities for fiscal year 2024 of $181.1 million consisted primarily of cash paid for acquisitions, net of cash acquired of $72.6 million, capital expenditures of $22.4 million, purchases of $426.6 million of short-term investments and other investing activities of $4.3 million, offset by proceeds of $344.8 million for the sale and maturities of short-term investments. For additional information on the cash paid for our acquisitions, net of cash acquired, see Note 4 - Acquisitions to our Consolidated Financial Statements included in this Annual Report.

Our cash flow from investing activities for fiscal year 2023 of $36.3 million consisted primarily of proceeds of $515.8 million related to the sale and maturities of short-term investments and proceeds from the sale of equipment of $8.0 million, partially offset by $375.1 million in purchases of short-term investments, $87.7 million for acquisitions, net of cash acquired and capital expenditures of $24.7 million. For additional information on the cash paid for our acquisitions, net of cash acquired, see Note 4 - Acquisitions to our Consolidated Financial Statements included in this Annual Report.

Cash Flow from Financing Activities:

During fiscal year 2024, our cash used in financing activities of $9.1 million was primarily related to $14.2 million of common stock withheld associated with employee taxes on vested equity awards, partially offset by $6.6 million of proceeds from stock option exercises and employee stock purchases.

During fiscal year 2023, our cash used in financing activities of $149.0 million was primarily related to the $120.8 million payment of the total outstanding principal balance of our Term Loans (as defined in Note 15 - Debt), $32.6 million of common stock withheld associated with employee taxes on vested equity awards, partially offset by $5.6 million of proceeds from employee stock purchases. For additional information on the payment of the total outstanding principal balance of our Term Loans, see Note 15 - Debt to our Consolidated Financial Statements included in this Annual Report.

Liquidity

As of September 27, 2024, we held $146.8 million of cash and cash equivalents, primarily deposited with financial institutions as well as $435.1 million of liquid short-term investments. The undistributed earnings of certain foreign subsidiaries are considered indefinitely reinvested for the periods presented and we do not intend to repatriate such earnings. We believe the decision to reinvest these earnings will not have a significant impact on our liquidity. As of September 27, 2024, cash held by our indefinitely reinvested foreign subsidiaries was $6.5 million, which, along with cash generated from foreign operations, is expected to be used in the support of international growth and working capital requirements as well as the repayment of certain intercompany loans.

Holders of the 2026 Convertible Notes (as defined in Note 15 - Debt to the Consolidated Financial Statements included in this Annual Report) may convert their notes at their option at any time prior to the close of business on the business day immediately preceding December 15, 2025 in multiples of $1,000 principal amount, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to $106.76 for the notes on each applicable trading day. We made an irrevocable election to pay cash for the principal amount of notes to be converted. The aggregate principal balance of the 2026 Convertible Notes is $450.0 million.

We plan to use our remaining available cash and cash equivalents and short-term investments for general corporate purposes, including working capital, payment on the 2026 Convertible Notes and leases, or for the acquisition of or investment in complementary technologies, design teams, products and businesses. We believe that our cash and cash equivalents, short-term investments and cash generated from operations will be sufficient to meet our working capital requirements for at least the next twelve months. We may need to raise additional capital from time to time through the issuance and sale of equity or debt securities, and there is no assurance that we will be able to do so on favorable terms or at all.

As of September 27, 2024, we had no off-balance sheet arrangements.

For additional information related to our Liquidity and Capital Resources, see Note 15 - Debt to our Consolidated Financial Statements included in this Annual Report.

Our other significant contractual payment obligations consist of purchase agreements and other commitments. We have purchase commitments of $151.1 million primarily related to services and inventory supply arrangements of which approximately $138.7 million is non-cancelable. In addition, we have $23.9 million in fixed payments associated with a power purchase agreement that commenced in fiscal 2023 and has a remaining 13-year term. See Note 16- Financing Obligation for additional detail on the power purchase agreement. Lastly, we have a purchase commitment of $6.7 million related to amounts payable for software over a two year period.

As of September 27, 2024, we estimated $1.9 million in asset retirement obligations primarily for the restoration of leased facilities upon the termination of the related leases. Although it is reasonably possible that our estimates could change materially in the next twelve months, we are presently unable to reliably estimate when any cash settlement of these obligations may occur.

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