MICROCHIP TECHNOLOGY INC

Previous wording

•Our expectations regarding investments and the timeline of expansions of our manufacturing capacity;

Current wording

•Our expectations regarding investments in equipment and facilities and the timeline of expansions of our manufacturing capacity;

Previous wording

•Our intent, including length, timing, and planned shutdown days, to reduce production levels at global fabrication facilities and its impact on inventory levels;

Current wording

•Our intent, including length, timing, planned closure days, to reduce production levels at global fabrication facilities, or closure of facilities completely and its impact on inventory levels and estimated cash savings;

Previous wording

•Our expectations regarding LTSAs, the Preferred Supply Program, and the realization of deferred revenue;

Current wording

•Our expectations regarding LTSAs and the realization of deferred revenue;

Previous wording

•Our belief that our IT system compromise has not had a material adverse effect on our business or resulted in any material damage to us;

Current wording

•Our belief that our IT system compromise will not have a material adverse effect on our business or result in any material damage to us;

Previous wording

We begin our Management's Discussion and Analysis of Financial Condition and Results of Operations with a summary of business and macroeconomic developments followed by a summary of our overall business strategy to provide an overview of the goals and overall direction of our business. This is followed by a discussion of the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then discuss our Results of Operations for the three and six months ended September 30, 2024 compared to the three and six months ended September 30, 2023, followed by an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in the section titled "Liquidity and Capital Resources."

Current wording

We begin our Management's Discussion and Analysis of Financial Condition and Results of Operations with a summary of business and macroeconomic developments followed by a summary of our overall business strategy to provide an overview of the goals and overall direction of our business. This is followed by a discussion of the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then discuss our Results of Operations for the three and nine months ended December 31, 2024 compared to the three and nine months ended December 31, 2023, followed by an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in the section titled "Liquidity and Capital Resources."

Previous wording

During fiscal 2024, many of our customers felt the adverse effects of slowing economic activity, increasing business uncertainty, persistent inflation and higher interest rates and we received requests to push out or cancel backlog resulting from customer actions to reduce inventory levels. Although we began to see evidence of improvements in our business in the March 2024 quarter which continued in the June 2024 and September 2024 quarters, such as a decrease in customer requests to push out or cancel backlog while bookings increased and the number of expedites and shipment pull in requests grew, overall the macroeconomic environment remained weak in the first half of fiscal 2025. In the September 2024 quarter, with the exception of certain markets we serve including aerospace and defense and the artificial intelligence subset of data centers, our customers continued to reduce inventory levels, driven by business uncertainty, ample supply, and shorter product lead times. We continue to prioritize our efforts to manage our high inventory levels, and our global production facilities continue to run at lower utilization rates. Consistent with the weak macroeconomic environment, most of our factory expansion activity remains paused and we have reduced our planned capital investments through fiscal 2026.

Current wording

During fiscal 2024, many of our customers felt the adverse effects of slowing economic activity, increasing business uncertainty, persistent inflation and higher interest rates and we received requests to push out or cancel backlog resulting from customer actions to reduce inventory levels. Although we began to see evidence of improvements in our business in the March 2024 quarter which have continued in fiscal 2025, such as a decrease in customer requests to push out or cancel backlog while the number of expedites and shipment pull in requests grew, the overall macroeconomic environment remained weak during the first nine months of fiscal 2025. With our inventory levels being high and having ample capacity in place, on December 2, 2024, we announced our decision to close our Tempe, Arizona wafer fabrication facility that we refer to as Fab 2. Many of the process technologies that run in Fab 2 also run in our Oregon and Colorado factories, which both have ample clean room space for expansion. We expect to be able to close Fab 2 in the September 2025 quarter at which time we expect that it will generate annual cash savings of approximately $90 million. Due to the high inventory of the products which are manufactured in Fab 2, we do not expect to see income statement savings from the closure until the start of the June 2026 quarter based on a first-in first-out basis. We expect that the Fab 2 closure will begin to help us moderate our inventory levels. Consistent with the weak macroeconomic environment, most of our factory expansion activity remains paused and we have reduced our planned capital investments through fiscal 2026.

Previous wording

Our manufacturing operations include wafer fabrication, wafer probe, assembly and test. In fiscal 2023, we announced our intent to expand our production capacity in the U.S. In the first three quarters of fiscal 2024, we continued our multi-year $800 million capacity expansion plan at Fab 4 in Gresham, Oregon and $880 million plan to expand our SiC and silicon production capacity, including the production of 8-inch wafers at Fab 5 in Colorado Springs, Colorado. In the fourth quarter of fiscal 2024, we paused our expansion efforts until business conditions warrant expansion. The ownership of a substantial portion of our manufacturing resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control, resulting in us being one of the lowest cost producers in the embedded control industry. By owning wafer fabrication facilities and our assembly and test operations, and by employing statistical techniques (statistical process control, designed experiments and wafer level monitoring), we have been able to achieve and maintain high production yields. Direct control over manufacturing resources allows us to shorten our design and production cycles. This control also allows us to capture a portion of the wafer manufacturing and assembly and testing profit margin. We outsource a significant portion of our manufacturing requirements to third parties and the amount of our outsourced manufacturing has increased in recent years due to our acquisitions of Microsemi and other companies that outsourced all or substantial portions of their manufacturing.

Current wording

Our manufacturing operations include wafer fabrication, wafer probe, assembly and test. In fiscal 2023, we announced our intent to expand our production capacity in the U.S. In the first three quarters of fiscal 2024, we continued our multi-year $800 million capacity expansion plan at Fab 4 in Gresham, Oregon and $880 million plan to expand our SiC and silicon production capacity, including the production of 8-inch wafers at Fab 5 in Colorado Springs, Colorado. In the fourth quarter of fiscal 2024, we paused our expansion efforts until business conditions warrant expansion. In the third quarter of fiscal 2025, we announced the closure of Fab 2 in Tempe, Arizona, which is expected to occur in the second quarter of fiscal 2026. The ownership of a substantial portion of our manufacturing resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control, resulting in us being one of the lowest cost producers in the embedded control industry. By owning wafer fabrication facilities and our assembly and test operations, and by employing statistical techniques (statistical process control, designed experiments and wafer level monitoring), we have been able to achieve and maintain high production yields. Direct control over manufacturing resources allows us to shorten our design and production cycles. This control also allows us to capture a portion of the wafer manufacturing and assembly and testing profit margin. We outsource a significant portion of our manufacturing requirements to third parties and the amount of our outsourced manufacturing has increased in recent years due to our acquisitions of Microsemi and other companies that outsourced all or substantial portions of their manufacturing.

Previous wording

There were no changes to our critical accounting policies and estimates during the first six months of the fiscal year ending March 31, 2025 compared to our "Critical Accounting Policies and Estimates" as previously described in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2024.

Current wording

There were no changes to our critical accounting policies and estimates during the first nine months of the fiscal year ending March 31, 2025 compared to our "Critical Accounting Policies and Estimates" as previously described in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2024.

Previous wording

The decreases in net sales in the three and six months ended September 30, 2024 compared to the three and six months ended September 30, 2023 were primarily due to adverse economic conditions, including slowing economic activity, increasing business uncertainty, persistent inflation, high interest rates, and shorter product lead times, which factors resulted in many customers having higher levels of inventory. Due to the size, complexity and diversity of our customer base, we are not able to quantify any material factor contributing to the changes in net sales. See our "Business and Macroeconomic Environment" discussion above for further information on our business outlook.

Current wording

The decreases in net sales in the three and nine months ended December 31, 2024 compared to the three and nine months ended December 31, 2023 were primarily due to adverse economic conditions, including slowing economic activity, increasing business uncertainty, persistent inflation, high interest rates, and shorter product lead times, which factors resulted in many customers having higher levels of inventory and delaying or reducing orders. Due to the size, complexity and diversity of our customer base, we are not able to quantify any material factor contributing to the changes in net sales. See our "Business and Macroeconomic Environment" discussion above for further information on our business outlook.

Previous wording

Other factors that we believe contributed to changes in our reported net sales for the three and six months ended September 30, 2024 compared to the three and six months ended September 30, 2023 and which are drivers of long-term trends in our net sales but which factors we are not able to quantify include:

Current wording

Other factors that we believe contributed to changes in our reported net sales for the three and nine months ended December 31, 2024 compared to the three and nine months ended December 31, 2023 and which are drivers of long-term trends in our net sales but which factors we are not able to quantify include:

Previous wording

•customers’ increasing needs for the flexibility offered by our programmable solutions;

Current wording

•customers’ needs for the flexibility offered by our programmable solutions;

Previous wording

•increasing semiconductor content in our customers’ products through our TSS product portfolio; and

Current wording

•increasing semiconductor content in our customers’ products; and

Previous wording

•adverse geopolitical conditions and trade restrictions.

Current wording

•geopolitical conditions and trade restrictions.

Previous wording

We sell a large number of products to a large and diverse customer base and there was not any single product or customer that accounted for a material portion of the change in our net sales in the three and six months ended September 30, 2024 or the three and six months ended September 30, 2023.

Current wording

We sell a large number of products to a large and diverse customer base and there was not any single product or customer that accounted for a material portion of the change in our net sales in the three and nine months ended December 31, 2024 or the three and nine months ended December 31, 2023.

Previous wording

Our mixed-signal microcontroller product line represents the largest component of our total net sales. Mixed-signal microcontrollers and associated application development systems accounted for approximately 51.1% and 51.5% of our net sales for the three and six months ended September 30, 2024, respectively, compared to approximately 56.8% of our net sales for each of the three and six months ended September 30, 2023.

Current wording

Our mixed-signal microcontroller product line represents the largest component of our total net sales. Mixed-signal microcontrollers and associated application development systems accounted for approximately 51.9% and 51.7% of our net sales for the three and nine months ended December 31, 2024, respectively, compared to approximately 56.3% and 56.7% of our net sales for the three and nine months ended December 31, 2023, respectively.

Previous wording

Net sales of our mixed-signal microcontroller products decreased 53.6% and 52.0% in the three and six months ended September 30, 2024, respectively, compared to the three and six months ended September 30, 2023. These decreases in net sales were primarily due to adverse economic conditions, including slowing economic activity, increasing business uncertainty, persistent inflation, high interest rates, and shorter product lead times, which factors resulted in many customers having higher levels of inventory.

Current wording

Net sales of our mixed-signal microcontroller products decreased 46.4% and 50.4% in the three and nine months ended December 31, 2024, respectively, compared to the three and nine months ended December 31, 2023. These decreases in net sales were primarily due to adverse economic conditions, including slowing economic activity, increasing business uncertainty, competitive pressures, persistent inflation, high interest rates, and shorter product lead times, which factors resulted in many customers having higher levels of inventory and delaying or reducing orders.

Previous wording

Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. However, the overall average selling prices of our mixed-signal microcontroller products have remained relatively stable in recent periods due to the proprietary nature of these products. We have in the past been able to, and expect in the future to be able to, moderate average selling price declines in our mixed-signal microcontroller product lines by introducing new products with more features and higher prices.

Current wording

Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. However, the overall average selling prices of our mixed-signal microcontroller products have remained relatively stable in recent periods due to the proprietary nature of these products. We have in the past been able to moderate average selling price declines in our mixed-signal microcontroller product lines by introducing new products with more features and higher prices.

Previous wording

Our analog product line includes analog, interface, mixed-signal and timing products. Our analog product line accounted for approximately 25.1% and 25.9% of our net sales for the three and six months ended September 30, 2024, respectively, compared to approximately 27.6% and 27.7% of our net sales for the three and six months ended September 30, 2023, respectively.

Current wording

Our analog product line includes analog, interface, mixed-signal and timing products. Our analog product line accounted for approximately 26.6% and 26.1% of our net sales for the three and nine months ended December 31, 2024, respectively, compared to approximately 24.4% and 26.7% of our net sales for the three and nine months ended December 31, 2023, respectively.

Previous wording

Net sales from our analog product line decreased 53.1% and 50.4% in the three and six months ended September 30, 2024, respectively, compared to the three and six months ended September 30, 2023, primarily due to adverse economic conditions, including slowing economic activity, increasing business uncertainty, persistent inflation, high interest rates, and shorter product lead times, which factors resulted in many customers having higher levels of inventory.

Current wording

Net sales from our analog product line decreased 36.7% and 46.9% in the three and nine months ended December 31, 2024, respectively, compared to the three and nine months ended December 31, 2023, primarily due to adverse economic conditions, including slowing economic activity, increasing business uncertainty, persistent inflation, high interest rates, and shorter product lead times, which factors resulted in many customers having higher levels of inventory and delaying or reducing orders.

Previous wording

Our other product line includes FPGA products, royalties associated with licenses for the use of our SuperFlash and other technologies, sales of our intellectual property, fees for engineering services, memory products, timing systems, manufacturing services (wafer foundry and assembly and test subcontracting), legacy application specific integrated circuits, and certain products for aerospace applications. Revenue from these services and products accounted for approximately 23.8% and 22.6% of our net sales for the three and six months ended September 30, 2024, respectively, compared to approximately 15.6% and 15.5% of our net sales for the three and six months ended September 30, 2023, respectively. We recently settled an ongoing legal matter with one of our licensees. The impact of this settlement was the release of an accrual, which increased both our revenue and profits by $13.3 million in the September 2024 quarter.

Current wording

Our other product line includes FPGA products, royalties associated with licenses for the use of our SuperFlash and other technologies, sales of our intellectual property, fees for engineering services, memory products, timing systems, manufacturing services (wafer foundry and assembly and test subcontracting), legacy application specific integrated circuits, and certain products for aerospace applications. Revenue from these services and products accounted for approximately 21.5% and 22.2% of our net sales for the three and nine months ended December 31, 2024, respectively, compared to approximately 19.3% and 16.6% of our net sales for the three and nine months ended December 31, 2023, respectively. In the nine months ended December 31, 2024, we settled an ongoing legal matter with one of our licensees which resulted in the release of an accrual, which increased both our revenue and profits by $13.3 million in such nine month period.

Previous wording

Net sales related to these services and products decreased 21.1% and 22.9% in the three and six months ended September 30, 2024, respectively, compared to the three and six months ended September 30, 2023. These decreases in net sales were primarily due to adverse economic conditions, including slowing economic activity, increasing business uncertainty, persistent inflation, high interest rates, and shorter product lead times, which factors resulted in many customers having higher levels of inventory. Net sales of our other product line can fluctuate over time based on general economic and semiconductor industry conditions as well as changes in demand for our FPGA products, licenses, engineering services, memory products, timing systems, and manufacturing services (wafer foundry and assembly and test subcontracting).

Current wording

Net sales related to these services and products decreased 35.2% and 26.9% in the three and nine months ended December 31, 2024, respectively, compared to the three and nine months ended December 31, 2023. These decreases in net sales were primarily due to adverse economic conditions, including slowing economic activity, increasing business uncertainty, persistent inflation, high interest rates, and shorter product lead times, which factors resulted in many customers having higher levels of inventory and delaying or reducing orders. Net sales of our other product line can fluctuate over time based on general economic and semiconductor industry conditions as well as changes in demand for our FPGA products, licenses, engineering services, memory products, timing systems, and manufacturing services (wafer foundry and assembly and test subcontracting).

Previous wording

Distributors accounted for approximately 44% and 45% of our net sales in the three and six months ended September 30, 2024, respectively, and approximately 50% and 49% of our net sales in the three and six months ended September 30, 2023, respectively. With the exception of Arrow Electronics, our largest distributor, which accounted for 10% and 11% of our net sales in the six months ended September 30, 2024 and in the six months ended September 30, 2023, respectively, no other distributor or direct customer accounted for more than 10% of our net sales in the six months ended September 30, 2024 or in the six months ended September 30, 2023. Our distributors focus primarily on servicing the product requirements of a broad base of diverse customers. We believe that distributors provide an effective means of reaching this broad and diverse customer base and that customers recognize Microchip for its products and brand name and use distributors as an effective supply channel.

Current wording

Distributors accounted for approximately 43% and 45% of our net sales in the three and nine months ended December 31, 2024, respectively, and approximately 44% and 48% of our net sales in the three and nine months ended December 31, 2023, respectively. With the exception of Arrow Electronics, our largest distributor, which accounted for 10% and 12% of our net sales in the nine months ended December 31, 2024 and in the nine months ended December 31, 2023, respectively, no other distributor or direct customer accounted for more than 10% of our net sales in the nine months ended December 31, 2024 or in the nine months ended December 31, 2023. Our distributors focus primarily on servicing the product requirements of a broad base of diverse customers. We believe that distributors provide an effective means of reaching this broad and diverse customer base and that customers recognize Microchip for its products and brand name and use distributors as an effective supply channel.

Previous wording

At September 30, 2024, our distributors maintained 40 days of inventory of our products compared to 41 days at March 31, 2024. Over the past ten fiscal years, the days of inventory maintained by our distributors have fluctuated between approximately 17 days and 43 days. Inventory holding patterns at our distributors may have a material impact on our net sales. Due to the relatively high level of inventory days, we have accommodated efforts by our distributors to manage their inventory levels.

Current wording

At December 31, 2024, our distributors maintained 37 days of inventory of our products compared to 41 days at March 31, 2024. Over the past ten fiscal years, the days of inventory maintained by our distributors have fluctuated between approximately 17 days and 43 days. Inventory holding patterns at our distributors have had a material adverse impact on our net sales in recent periods. Due to the relatively high level of inventory days, we have accommodated efforts by our distributors to manage their inventory levels.

Previous wording

Americas sales include sales to customers in the U.S., Canada, Central America and South America. Sales to foreign customers accounted for approximately 74% and 75% of our total net sales in the three and six months ended September 30, 2024, respectively, compared to approximately 75% and 76% of our total net sales in each of the three and six months ended September 30, 2023, respectively. The decreases in net sales in the European market in the three and six months ended September 30, 2024 compared to the three and six months ended September 30, 2023 were due to general weakness in the European economy, and decreases in our net sales in the European industrial and automotive markets, which were particularly weak. Our net sales in the Americas and Asia market decreased in the three and six months ended September 30, 2024 compared to the three and six months ended September 30, 2023, primarily due to adverse economic conditions, including slowing economic activity, persistent inflation, high interest rates, and shorter product lead times. Substantially all of our foreign sales are U.S. dollar denominated. Our sales force in the Americas and Europe supports a significant portion of the design activity for products which are ultimately shipped to Asia.

Current wording

Americas sales include sales to customers in the U.S., Canada, Central America and South America. Sales to foreign customers accounted for approximately 76% and 75% of our total net sales in the three and nine months ended December 31, 2024, respectively, compared to approximately 75% of our total net sales in each of the three and nine months ended December 31, 2023, respectively. The decreases in net sales in the European market in the three and nine months ended December 31, 2024 compared to the three and nine months ended December 31, 2023 were due to general weakness in the European economy, and decreases in our net sales in the European industrial and automotive markets, which were particularly weak. Our net sales in the Americas and Asia market decreased in the three and nine months ended December 31, 2024 compared to the three and nine months ended December 31, 2023, primarily due to adverse economic conditions, including slowing economic activity, persistent inflation, high interest rates, and shorter product lead times which resulted in delayed or reduced orders. Substantially all of our foreign sales are U.S. dollar denominated. Our sales force in the Americas and Europe supports a significant portion of the design activity for products which are ultimately shipped to Asia.

Previous wording

The primary reason for the decreases in gross profit of $799.9 million and $1.54 billion in the three and six months ended September 30, 2024, respectively, compared to the three and six months ended September 30, 2023, respectively, was an unfavorable net impact of sales volume, product mix, geographic mix, and average gross profit per unit in the three and six months ended September 30, 2024. The net impact of product mix and average gross profit per unit may fluctuate over time due to the mix of sales volumes of lower or higher margin products, changes in selling prices, and fluctuations in product costs. We are not able to separately quantify these impacts on our gross profit. The net impact to our gross profit from inventory reserve charges was an adverse impact of $31.1 million and $60.4 million in the three and six months ended September 30, 2024, respectively, compared to the three and six months ended September 30, 2023, respectively. The gross margin impact of changes in licensing revenue, which has no associated cost of sales, was a favorable impact of $12.2 million and $0.6 million in the three and six months ended September 30, 2024, respectively, compared to the three and six months ended September 30, 2023, respectively. The impact of unabsorbed capacity charges was an adverse impact of $40.0 million and $76.0 million in the three and six months ended September 30, 2024, respectively, compared to the three and six months ended September 30, 2023, respectively. In the three and six months ended September 30, 2023, the impact of unabsorbed capacity charges was not material. Unabsorbed capacity charges are expensed as incurred when we operate our manufacturing facilities below normal levels.

Current wording

The primary reasons for the decreases in gross profit of $506.9 million and $2.05 billion in the three and nine months ended December 31, 2024, respectively, compared to the three and nine months ended December 31, 2023, respectively, were an unfavorable net impact of sales volume, product mix, geographic mix, and average gross profit per unit in the three and nine months ended December 31, 2024. The net impact of product mix and average gross profit per unit may fluctuate over time due to the mix of sales volumes of lower or higher margin products, changes in selling prices, and fluctuations in product costs. We are not able to separately quantify these impacts on our gross profit. The net impact to our gross profit from inventory reserve charges was an adverse impact of $24.4 million and $84.8 million in the three and nine months ended December 31, 2024, respectively, compared to the three and nine months ended December 31, 2023, respectively. The gross margin impact of changes in licensing revenue, which has no associated cost of sales, was a favorable impact of $6.8 million and $7.4 million in the three and nine months ended December 31, 2024, respectively, compared to the three and nine months ended December 31, 2023, respectively. The impact of unabsorbed capacity charges was an adverse impact of $34.1 million and $110.1 million in the three and nine months ended December 31, 2024, respectively, compared to the three and nine months ended December 31, 2023, respectively. In the three and nine months ended December 31, 2023, the impact of unabsorbed capacity charges was not material. Unabsorbed capacity charges are expensed as incurred when we operate our manufacturing facilities below normal levels.

Previous wording

Our overall inventory levels were $1.34 billion at September 30, 2024, compared to $1.32 billion at March 31, 2024. We maintained 247 days of inventory on our balance sheet at September 30, 2024 compared to 224 days of inventory at March 31, 2024. Our overall inventory level was generally flat as a result of our efforts to balance manufacturing production, customer demand and inventory levels. However, our days of inventory increased significantly due to lower net sales. Our inventory amounts are impacted by timing of shipment activity in the quarter, the timing of receipt of raw materials, foundry wafers, and strategic last time buy materials and completion of finished goods.

Current wording

Our overall inventory levels were $1.36 billion at December 31, 2024, compared to $1.32 billion at March 31, 2024. We maintained 266 days of inventory on our balance sheet at December 31, 2024 compared to 224 days of inventory at March 31, 2024. Our overall inventory level was generally flat as a result of our efforts to balance manufacturing production, customer demand and inventory levels. However, our days of inventory increased significantly due to lower net sales. Our inventory amounts are impacted by timing of shipment activity in the quarter, the timing of receipt of raw materials, foundry wafers, and strategic last time buy materials and completion of finished goods. Nonetheless, we believe that our current inventory and production capacity are adequate to fulfill the projected requirements of our customers.

Previous wording

We operate assembly and test facilities in Thailand, the Philippines, and other locations throughout the world. Approximately 63% and 67% of our assembly requirements were performed in our internal assembly facilities during the three and six months ended September 30, 2024, respectively, compared to approximately 58% during each of the three and six months ended September 30, 2023. Approximately 64% and 67% of our test requirements were performed in our internal facilities during the three and six months ended September 30, 2024, respectively, compared to approximately 73% and 71% during the three and six months ended September 30, 2023, respectively. The percentage of our assembly and test operations that are performed internally fluctuates over time based on supply and demand conditions in the semiconductor industry, our internal capacity capabilities and our acquisition activities. We believe that the assembly and test operations performed at our internal facilities provide us with significant cost savings compared to third-party contractor assembly and test costs, as well as increased control over these portions of the manufacturing process. We plan to continue to selectively invest in assembly and test equipment to increase our internal capacity capabilities and transition certain outsourced assembly and test capacity to our internal facilities.

Current wording

We operate assembly and test facilities in Thailand, the Philippines, and other locations throughout the world. Approximately 67% of our assembly requirements were performed in our internal assembly facilities during each of the three and nine months ended December 31, 2024, compared to approximately 59% and 58% during the three and nine months ended December 31, 2023, respectively. Approximately 67% of our test requirements were performed in our internal test facilities during each of the three and nine months ended December 31, 2024, compared to approximately 72% and 71% during the three and nine months ended December 31, 2023, respectively. The percentage of our assembly and test operations that are performed internally fluctuates over time based on supply and demand conditions in the semiconductor industry, our internal capacity capabilities and our acquisition activities. We believe that the assembly and test operations performed at our internal facilities provide us with significant cost savings compared to third-party contractor assembly and test costs, as well as increased control over these portions of the manufacturing process. We plan to continue to selectively invest in assembly and test equipment to increase our internal capacity capabilities and transition certain outsourced assembly and test capacity to our internal facilities.

Previous wording

We rely on outside wafer foundries for a significant portion of our wafer fabrication requirements. Approximately 66% and 65% of our net sales came from products that were produced at outside wafer foundries during the three and six months ended September 30, 2024, respectively, compared to approximately 65% and 66% during the three and six months ended September 30, 2023, respectively. This percentage may vary based on supply and demand conditions in the market.

Current wording

We rely on outside wafer foundries for a significant portion of our wafer fabrication requirements. Approximately 64% of our net sales came from products that were produced at outside wafer foundries during each of the three and nine months ended December 31, 2024, compared to approximately 64% and 65% during the three and nine months ended December 31, 2023, respectively. This percentage may vary based on supply and demand conditions in the market.

Previous wording

R&D expenses for the three months ended September 30, 2024 were $240.7 million, or 20.7% of net sales, compared to $292.6 million, or 13.0% of net sales, for the three months ended September 30, 2023. R&D expenses for the six months ended September 30, 2024 were $482.4 million, or 20.1% of net sales, compared to $591.1 million, or 13.0% of net sales, for the six months ended September 30, 2023. We are committed to investing in new and enhanced products, including development systems software, and in our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our competitive position. R&D costs are expensed as incurred. Assets purchased to support our ongoing research and development activities are capitalized when related to products which have achieved technological feasibility or that have alternative future uses and are amortized over their expected useful lives. R&D expenses include labor, depreciation, masks, prototype wafers, and expenses for the development of process technologies, new packages, and software to support new products and design environments.

Current wording

R&D expenses for the three months ended December 31, 2024 were $246.2 million, or 24.0% of net sales, compared to $266.0 million, or 15.1% of net sales, for the three months ended December 31, 2023. R&D expenses for the nine months ended December 31, 2024 were $728.6 million, or 21.2% of net sales, compared to $857.1 million, or 13.6% of net sales, for the nine months ended December 31, 2023. We are committed to investing in new and enhanced products, including development systems software, and in our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our competitive position. R&D costs are expensed as incurred. Assets purchased to support our ongoing research and development activities are capitalized when related to products which have achieved technological feasibility or that have alternative future uses and are amortized over their expected useful lives. R&D expenses include labor, depreciation, masks, prototype wafers, and expenses for the development of process technologies, new packages, and software to support new products and design environments.

Previous wording

R&D expenses decreased $51.9 million, or 17.7%, for the three months ended September 30, 2024 over the same period last year. R&D expenses decreased $108.7 million, or 18.4%, for the six months ended September 30, 2024 over the same period last year. The primary reason for the decreases in R&D expenses was lower employee compensation costs.

Current wording

R&D expenses decreased $19.8 million, or 7.4%, for the three months ended December 31, 2024 over the same period last year. R&D expenses decreased $128.5 million, or 15.0%, for the nine months ended December 31, 2024 over the same period last year. The primary reason for the decreases in R&D expenses was lower employee compensation costs.

Previous wording

Selling, general and administrative expenses for the three months ended September 30, 2024 were $157.0 million, or 13.5% of net sales, compared to $196.6 million, or 8.7% of net sales, for the three months ended September 30, 2023. Selling, general and administrative expenses for the six months ended September 30, 2024 were $307.5 million, or 12.8% of net sales, compared to $400.2 million, or 8.8% of net sales, for the six months ended September 30, 2023. Our goal is to continue to be more efficient with our selling, general and administrative expenses. Selling, general and administrative expenses include salary expenses related to field sales, marketing and administrative personnel, advertising and promotional expenditures and legal expenses as well as costs related to our direct sales force, CEMs and ESEs who work remotely from sales offices worldwide to stimulate demand by assisting customers in the selection and use of our products.

Current wording

Selling, general and administrative expenses for the three months ended December 31, 2024 were $158.2 million, or 15.4% of net sales, compared to $172.2 million, or 9.8% of net sales, for the three months ended December 31, 2023. Selling, general and administrative expenses for the nine months ended December 31, 2024 were $465.7 million, or 13.6% of net sales, compared to $572.4 million, or 9.1% of net sales, for the nine months ended December 31, 2023. Our goal is to continue to be more efficient with our selling, general and administrative expenses. Selling, general and administrative expenses include salary expenses related to field sales, marketing and administrative personnel, advertising and promotional expenditures and legal expenses as well as costs related to our direct sales force, CEMs and ESEs who work remotely from sales offices worldwide to stimulate demand by assisting customers in the selection and use of our products.

Previous wording

Selling, general and administrative expenses decreased $39.6 million, or 20.1%, for the three months ended September 30, 2024 over the same period last year. Selling, general and administrative expenses decreased $92.7 million, or 23.2%, for the six months ended September 30, 2024 over the same period last year. The primary reason for the decreases in selling, general and administrative expenses was lower employee compensation costs.

Current wording

Selling, general and administrative expenses decreased $14.0 million, or 8.1%, for the three months ended December 31, 2024 over the same period last year. Selling, general and administrative expenses decreased $106.7 million, or 18.6%, for the nine months ended December 31, 2024 over the same period last year. The primary reason for the decreases in selling, general and administrative expenses was lower employee compensation costs.

Previous wording

Amortization of acquired intangible assets for the three and six months ended September 30, 2024 was $122.7 million and $245.7 million, respectively, compared to $151.4 million and $302.9 million for the three and six months ended September 30, 2023, respectively. The primary reason for the decreases in acquired intangible asset amortization was due to the use of accelerated amortization methods for assets placed in service in previous fiscal years.

Current wording

Amortization of acquired intangible assets for the three and nine months ended December 31, 2024 was $122.6 million and $368.3 million, respectively, compared to $151.3 million and $454.2 million for the three and nine months ended December 31, 2023, respectively. The primary reason for the decreases in acquired intangible asset amortization was due to the use of accelerated amortization methods for assets placed in service in previous fiscal years.

Previous wording

During the three and six months ended September 30, 2024, we incurred special charges and other, net of $1.5 million and $4.1 million, respectively. During the three and six months ended September 30, 2023, we incurred special charges and other, net of $1.8 million and $3.5 million, respectively. The special charges and other, net incurred during these periods, primarily related to restructuring of acquired and existing wafer fabrication operations to increase operational efficiency.

Current wording

During the three and nine months ended December 31, 2024, we incurred special charges and other, net of $3.5 million and $7.6 million, respectively, primarily related to employee severance and the restructuring of acquired and existing wafer fabrication operations to increase operational efficiency. During the three and nine months ended December 31, 2023, we incurred special charges and other, net of $1.1 million and $4.6 million, respectively, primarily related to restructuring of acquired and existing wafer fabrication operations to increase operational efficiency.

Previous wording

Interest expense in the three and six months ended September 30, 2024 was $59.1 million and $120.9 million, respectively, compared to $46.8 million and $94.0 million, respectively, for the three and six months ended September 30, 2023. The primary reasons for the increases in interest expense were higher debt balances and higher interest rates on such outstanding debt balances in the three and six months ended September 30, 2024.

Current wording

Interest expense in the three and nine months ended December 31, 2024 was $68.7 million and $189.6 million, respectively, compared to $49.2 million and $143.2 million, respectively, for the three and nine months ended December 31, 2023. The primary reasons for the increases in interest expense were higher debt balances and higher interest rates on such outstanding debt balances in the three and nine months ended December 31, 2024.

Previous wording

During the three and six months ended September 30, 2023, we recognized losses of $3.1 million and $12.2 million, respectively, related to the settlement of a portion of our outstanding Convertible Debt.

Current wording

During the three and nine months ended December 31, 2024, we recognized losses of $0.3 million related to the settlement of our 2025 Term Loan Facility. During the nine months ended December 31, 2023, we recognized losses of $12.2 million related to the settlement of a portion of our outstanding Convertible Debt.

Previous wording

Our provision for income taxes is attributable to U.S. federal, state, and foreign income taxes. A comparison of our tax rates for the six months ended September 30, 2024 and September 30, 2023 is not meaningful due to the amount of pre-tax income, and income tax expense recorded during the prior period.

Current wording

Our provision for income taxes is attributable to U.S. federal, state, and foreign income taxes. A comparison of our effective tax rates for the nine months ended December 31, 2024 and December 31, 2023 is not meaningful due to changes in the amount of pre-tax income earned, changes in the mix of jurisdictions in which income is earned, and the impact of discrete items relative to the amount of income earned.

Previous wording

We are subject to taxation in many jurisdictions in which we have operations. The effective tax rates that we pay in these jurisdictions vary widely, but they are generally lower than our combined U.S. federal and state effective tax rate. Our domestic blended statutory tax rate in each of the six months ended September 30, 2024 and September 30, 2023 was approximately 22%. Our non-U.S. blended statutory tax rates in the six months ended September 30, 2024 and September 30, 2023 were lower than this amount. The difference in rates applicable in foreign jurisdictions results from a number of factors, including lower statutory rates, tax holidays, financing arrangements and other factors. Our effective tax rate has been and will continue to be impacted by the geographical dispersion of our earnings and losses.

Current wording

We are subject to taxation in many jurisdictions in which we have operations. The effective tax rates that we pay in these jurisdictions vary widely, but they are generally lower than our combined U.S. federal and state effective tax rate. Our domestic blended statutory tax rate in each of the nine months ended December 31, 2024 and December 31, 2023 was approximately 22%. Our non-U.S. blended statutory tax rates in the nine months ended December 31, 2024 and December 31, 2023 were lower than this amount. The difference in rates applicable in foreign jurisdictions results from a number of factors, including lower statutory rates, tax holidays, financing arrangements and other factors. Our effective tax rate has been and will continue to be impacted by the geographical dispersion of our earnings and losses.

Previous wording

In May 2023, we received a proposed income adjustment from the Malaysian Inland Revenue Board (IRB) for fiscal 2020. In December 2023, we received a Notice of Assessment from the IRB asserting the same proposed income adjustment. If the adjustment is upheld by the highest court that has jurisdiction over this matter in Malaysia, it could result in income taxes and penalties up to $410.0 million. The disputed amounts largely relate to the characterization of certain assets. Depending on the outcome of the IRB audit, we may need to adjudicate this matter in Malaysia, and if we do, we may be required to pay the assessment and then, upon a series of favorable court rulings, request a refund of the amount. The timing of adjudicating this matter is uncertain but could commence in the next 12 months.

Current wording

In May 2023, we received a proposed income adjustment from the Malaysian Inland Revenue Board (IRB) for fiscal 2020. In December 2023, we received a Notice of Assessment from the IRB asserting the same proposed income adjustment. If the adjustment is upheld by the highest court that has jurisdiction over this matter in Malaysia, it could result in income taxes and penalties up to $410.0 million. The disputed amounts largely relate to the characterization of certain assets. Depending on the outcome of the IRB audit, we may need to adjudicate this matter in Malaysia, and if we do, we may be required to pay the assessment and then, upon a series of favorable court rulings, request a refund of the amount. The timing of adjudicating this matter is uncertain but could occur in the next 12 months. We firmly believe that the assessment is without merit and we plan to pursue all available administrative and judicial remedies necessary to resolve this matter. We intend to vigorously defend our position and we are confident in our ability to prevail on the merits.

Previous wording

We firmly believe that the assessments described above are without merit and plan to pursue all available administrative and judicial remedies necessary to resolve these matters. We intend to vigorously defend our positions and we are confident in our ability to prevail on the merits. We regularly assess the likelihood of adverse outcomes resulting from examinations such as these to determine the adequacy of our tax reserves. The ultimate outcome of disputes of this nature is uncertain, and if the IRS and IRB were to prevail on their assertions, the assessed tax, penalties, and deficiency interest could have a material adverse impact on our financial position, results of operations or cash flows.

Current wording

We regularly assess the likelihood of adverse outcomes resulting from examinations such as these to determine the adequacy of our tax reserves. The ultimate outcome of disputes of this nature is uncertain, and if the IRS and IRB were to prevail on their assertions, the assessed tax, penalties, and deficiency interest could have a material adverse impact on our financial position, results of operations or cash flows.