QORVO, INC. 
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements, including the notes thereto, set forth in Part II, Item 8 of this report.
OVERVIEW
Company
Qorvo® is a global leader in the development and commercialization of technologies and products for wireless, wired and power markets.
We design, develop, manufacture and market our products toU.S. and international OEMs and ODMs in two operating segments, MP and IDP, which are also our reportable segments. MP is a global supplier of cellular, UWB, Wi-Fi and other wireless solutions for a variety of applications, including smartphones, wearables, laptops, tablets and IoT. IDP is a global supplier of RF, SoC and power management solutions for a wide range of markets, including cellular and IT infrastructure, automotive, renewable energy, defense and IoT. In fiscal 2022, the semiconductor industry continued to experience supply constraints, and we have taken actions to address short and long-term supply requirements. During the second quarter endedOctober 2, 2021 , we entered into a long-term capacity agreement with a foundry supplier to reserve manufacturing supply capacity. Under the agreement we are required to purchase, and the foundry supplier is required to supply, a certain number of wafers for calendar years 2022 through 2025. See Note 11 of the Notes to Consolidated Financial Statements for additional information regarding this agreement. The COVID-19 pandemic (including the recent COVID-19 lockdowns inChina ) has been a contributing factor of the semiconductor industry supply constraints and may continue to cause volatility and uncertainty in customer demand, worldwide economies and financial markets for an extended period of time. To date, any negative impact of COVID-19 on the overall demand for our products, cash flows from operations, need for capital expenditures and our liquidity position has been limited, although we are addressing capacity constraints in our supply chain as described above. However, the recent COVID-19 lockdowns inChina could negatively impact the overall demand for our products, cash flows from operations, need for capital expenditures and our liquidity position in future periods. 33
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Fiscal 2022 Financial Highlights
•Revenue increased 15.7% in fiscal 2022 to$4,645.7 million , compared to$4,015.3 million in fiscal 2021, driven primarily by higher demand for our 5G mobile solutions and our power management, automotive and broadband products, partially offset by lower demand for our base station and defense and aerospace products. •Gross margin for fiscal 2022 was 49.2%, compared to 46.9% in fiscal 2021, primarily due to lower intangible amortization expense as well as lower unit costs on higher volume and productivity. The increase in gross margin was partially offset by average selling price erosion. •Operating income was$1,226.1 million in fiscal 2022, compared to$906.6 million in fiscal 2021. This increase was primarily due to higher revenue and favorable gross margin, partially offset by higher operating expenses. Operating expenses increased primarily due to higher personnel costs, a goodwill impairment charge and increased product development spend, partially offset by lower intangible amortization expense and lower incentive-based compensation.
•Net income per diluted share was
•Cash flows from operations was$1,049.2 million for fiscal 2022, compared to$1,301.9 million for fiscal 2021. This year-over-year decrease was primarily due to increased inventory as well as prepayments of certain fees and deposits associated with a long-term capacity reservation agreement. The increased inventory related to the lower demand for 5G handsets fromChina -based OEMs and the build of inventory in anticipation of certain customers' product ramps.
•Capital expenditures were
•We completed the acquisitions of
•We recorded a
•We issued
•We repaid
•We repurchased approximately 7.3 million shares of our common stock for
approximately
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--------------------------------------------------------------------------------Table of Contents RESULTS OF OPERATIONS Consolidated The table below presents a summary of our results of operations for fiscal years 2022 and 2021 along with a year-over-year comparison. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedApril 3, 2021 , filed with theSEC onMay 24, 2021 , which is incorporated by reference herein, for a summary of our results of operations for the fiscal year endedMarch 28, 2020 along with a year-over-year comparison between fiscal years 2021 and 2020. Fiscal 2022 Fiscal 2021 Increase (Decrease) (In thousands, except percentages) Dollars % of Revenue Dollars % of Revenue Dollars Percentage Change Revenue$ 4,645,714 100.0 %$ 4,015,307 100.0 %$ 630,407 15.7 % Cost of goods sold 2,359,546 50.8 2,131,741 53.1 227,805 10.7 Gross profit 2,286,168 49.2 1,883,566 46.9 402,602 21.4 Research and development 623,636 13.4 570,395 14.2 53,241 9.3 Selling, general and administrative 349,718 7.5 367,238 9.1 (17,520) (4.8) Other operating expense 86,745 1.9 39,306 1.0 47,439 120.7 Operating income$ 1,226,069 26.4 %$ 906,627 22.6 %$ 319,442 35.2 % Revenue Revenue increased primarily due to higher demand for our 5G mobile solutions and our power management, automotive and broadband products, partially offset by lower demand for our base station and defense and aerospace products. The higher demand for our mobile solutions was driven by 5G content increases with our largest customers, and the increased demand for our power management products was driven by the migration to smaller and more efficient power solutions. The increased demand for our automotive and broadband products was driven by the proliferation of connected devices and the increasing requirements for higher efficiency, greater throughput and smaller size. The lower demand for our base station products was attributed to fewer 5G massive Multiple-Input/Multiple-Output ("mMIMO") deployments inChina , and the lower demand for our defense and aerospace products was due to the timing of programs. We provided our products to our largest end customer (Apple) through sales to multiple contract manufacturers, which in the aggregate accounted for approximately 33% and 30% of total revenue in fiscal years 2022 and 2021, respectively. Samsung accounted for approximately 11% and 7% of total revenue in fiscal years 2022 and 2021, respectively. These customers primarily purchase RF solutions for a variety of mobile devices.
International shipments amounted to
Gross Margin
Gross margin increased primarily due to lower intangible amortization expense as well as lower unit costs on higher volume and productivity. The increase in gross margin was partially offset by average selling price erosion.
Operating Expenses
Research and Development
R&D spending increased primarily due to additional headcount and higher design
and development costs associated with our UWB solutions, biotechnology testing
solutions and 5G mobile solutions as well as the acquisition of United SiC.
These increases were partially offset by lower incentive-based compensation.
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Selling, General and Administrative
Selling, general and administrative expense decreased primarily due to lower intangible amortization expense and lower incentive-based compensation. These decreases were partially offset by higher personnel and commission expenses.
Other Operating Expense
Other operating expense increased in fiscal 2022 primarily due to a goodwill
impairment charge of
Operating Segments
Mobile Products
Fiscal Year Increase
(In thousands, except percentages) 2022 2021 Dollars Percentage Change
Revenue $ 3,545,253 $ 2,856,813 $ 688,440 24.1 %
Operating income 1,290,132 1,008,171 281,961 28.0
Operating income as a % of revenue 36.4 % 35.3 %
MP revenue increased primarily due to higher demand for our mobile solutions driven by 5G content increases with our largest customers.
MP operating income increased primarily due to the effects of increased revenue and lower unit costs on higher volume and productivity. These increases were partially offset by average selling price erosion and higher operating expenses. Operating expenses increased primarily due to additional headcount and higher design and development costs associated with our UWB solutions and 5G mobile solutions as well as the acquisition ofNextInput . These increases were partially offset by lower incentive-based compensation.
Infrastructure and Defense Products
Fiscal Year Decrease
(In thousands, except percentages) 2022 2021 Dollars Percentage Change
Revenue $ 1,100,461 $ 1,158,494 $ (58,033) (5.0) %
Operating income 261,511 283,507 (21,996) (7.8)
Operating income as a % of revenue 23.8 % 24.5 %
IDP revenue decreased primarily due to lower demand for our base station and
defense and aerospace products, partially offset by increased demand for our
power management, automotive and broadband products. The lower demand for our
base station products was attributed to fewer 5G mMIMO deployments in China , and
the lower demand for our defense and aerospace products was due to the timing of
programs. The increased demand for our power management products was driven by
the migration to smaller and more efficient power solutions. The increased
demand for our automotive and broadband products was driven by the proliferation
of connected devices and the increasing requirements for higher efficiency,
greater throughput and smaller size.
IDP operating income decreased primarily due to decreased revenue and higher
operating expenses, partially offset by favorable changes in gross margin.
Operating expenses increased primarily due to increased expenses associated with
the design and development of our biotechnology testing solutions as well as the
acquisition of United SiC, partially offset by lower incentive-based
compensation. Gross margin was favorable primarily due to improved product mix,
average selling price expansion and lower costs from improved factory
utilization.
See Note 17 of the Notes to Consolidated Financial Statements for a reconciliation of segment operating income to the consolidated operating income for fiscal years 2022, 2021 and 2020.
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INTEREST, OTHER INCOME (EXPENSE) AND INCOME TAXES
Fiscal Year
(In thousands) 2022 2021
Interest expense $ (63,326) $ (75,198)
Other income (expense), net 18,341 (24,049)
Income tax expense (147,731) (73,769)
Interest expense
During fiscal 2022, we recorded interest expense primarily related to our 4.375%
senior notes due 2029 (the "2029 Notes") and our 3.375% senior notes due 2031
(the "2031 Notes"). During fiscal 2021, we recorded interest expense primarily
related to our 5.50% senior notes due July 15, 2026 (the "2026 Notes"), the 2029
Notes and the 2031 Notes. Interest expense in the preceding table for fiscal
years 2022 and 2021 is net of capitalized interest of $3.7 million and $4.1
million , respectively.
Other income (expense), net
Other income (expense) includes realized or unrealized gains and losses from investments, interest income, foreign currency changes and losses on debt extinguishments.
During fiscal 2022, we recorded$12.0 million of income based on our share of the earnings from our limited partnership investments, and we recorded net gains of$2.7 million from other investments. During fiscal 2021, we recorded$21.5 million of income based on our share of the earnings from our limited partnership investments, and we recorded net gains of$9.1 million from other investments. In addition, we recognized a loss on debt extinguishment of$62.0 million primarily related to the redemption of our 2026 Notes onOctober 16, 2020 .
Income tax expense
Income tax expense for fiscal 2022 was$147.7 million . This was primarily comprised of tax expense related to domestic and international operations generating pre-tax book income (exclusive of nondeductible expenses associated with acquisition related adjustments), the impact of the Tax Act's GILTI provisions and an increase in gross unrecognized tax benefits, offset by a tax benefit related to international operations generating pre-tax book losses and domestic tax credits. For fiscal 2022, this resulted in an annual effective tax rate of 12.5%. Income tax expense for fiscal 2021 was$73.8 million . This was primarily comprised of tax expense related to international operations generating pre-tax book income, the impact of the Tax Act's GILTI provisions, the reversal of the permanent reinvestment assertion with regards to certain unrepatriated foreign earnings and an increase in gross unrecognized tax benefits, offset by a tax benefit related to international operations generating pre-tax book losses and domestic tax credits. For fiscal 2021, this resulted in an annual effective tax rate of 9.1%. A valuation allowance has been established against deferred tax assets in the taxing jurisdictions where, based upon the positive and negative evidence available, it is more likely than not that the related deferred tax assets will not be realized. Realization is dependent upon generating future income in the taxing jurisdictions in which the operating loss carryovers, credit carryovers, depreciable tax basis and other deferred tax assets exist. Management reevaluates the ability to realize the benefit of these deferred tax assets on a quarterly basis. As of the end of fiscal years 2022 and 2021, the valuation allowance against domestic and foreign deferred tax assets was$36.3 million and$36.5 million , respectively.
See Note 13 of the Notes to Consolidated Financial Statements for additional information regarding income taxes.
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STOCK-BASED COMPENSATION
Under Accounting Standards Codification ("ASC") 718, "Compensation - Stock
Compensation," stock-based compensation cost is measured at the grant date,
based on the estimated fair value of the award using an option pricing model for
stock options (Black-Scholes) and market price for restricted stock units, and
is recognized as expense over the employee's requisite service period.
As of
LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operations is our primary source of liquidity. As ofApril 2, 2022 , we had working capital of approximately$1,774.7 million , including$972.6 million in cash and cash equivalents, compared to working capital of approximately$1,802.2 million , including$1,397.9 million in cash and cash equivalents, as ofApril 3, 2021 . Our$972.6 million of total cash and cash equivalents as ofApril 2, 2022 , includes$831.8 million held by our foreign subsidiaries, of which$709.5 million is held byQorvo International Pte. Ltd. inSingapore . If the undistributed earnings of our foreign subsidiaries are needed in theU.S. , we may be required to pay state income and/or foreign local withholding taxes to repatriate these earnings. Credit Agreement OnSeptember 29, 2020 , we and certain of ourU.S. subsidiaries (the "Guarantors") entered into a five-year unsecured senior credit facility pursuant to a credit agreement (as amended, restated, modified or otherwise supplemented from time to time, the "2020 Credit Agreement") withBank of America, N.A ., acting as administrative agent, and a syndicate of lenders. The 2020 Credit Agreement amended and restated the previous credit agreement dated as ofDecember 5, 2017 (the "2017 Credit Agreement"). The 2020 Credit Agreement included a senior term loan (the "2020 Term Loan") of$200.0 million and a senior revolving line of credit (the "Revolving Facility") of up to$300.0 million (collectively the "Credit Facility"). The Revolving Facility includes a$25.0 million sublimit for the issuance of standby letters of credit and a$10.0 million sublimit for swing line loans. The Credit Facility is available to finance working capital, capital expenditures and other general corporate purposes.
Pursuant to the 2020 Credit Agreement, we may request one or more additional
tranches of term loans or increases to the Revolving Facility, up to an
aggregate of
During fiscal 2022, there were no borrowings under the Revolving Facility.
During fiscal 2021, we made principal payments totaling$2.5 million on the term loan under the 2017 Credit Agreement (the "2017 Term Loan"). On the closing date of the 2020 Credit Agreement, we repaid the remaining principal balance of$97.5 million on the 2017 Term Loan and concurrently drew$200.0 million under the 2020 Term Loan. During fiscal 2021, we made principal payments totaling$2.5 million on the 2020 Term Loan, and during fiscal 2022, we repaid the remaining principal balance of$197.5 million on the 2020 Term Loan. The 2020 Credit Agreement contains various conditions, covenants and representations with which we must be in compliance in order to borrow funds and to avoid an event of default. As ofApril 2, 2022 , we were in compliance with these covenants. See Note 9 of the Notes to Consolidated Financial Statements for further information about the Credit Agreement, including applicable interest rates. 38 -------------------------------------------------------------------------------- Table of Contents Stock Repurchases OnOctober 31, 2019 , we announced that our Board of Directors authorized a share repurchase program to repurchase up to$1.0 billion of our outstanding common stock, which included approximately$117.0 million authorized under a prior program which was terminated concurrent with this authorization. OnMay 5, 2021 , we announced that our Board of Directors authorized a new share repurchase program to repurchase up to$2.0 billion of our outstanding common stock, which included approximately$236.9 million authorized under the program announced onOctober 31, 2019 , which was terminated concurrent with the new authorization. As ofApril 2, 2022 , there was$861.7 million of availability under the share repurchase program. Under our share repurchase programs, repurchases are made in accordance with applicable securities laws on the open market or in privately negotiated transactions. The extent to which we repurchase our shares, the number of shares and the timing of any repurchases depends on general market conditions, regulatory requirements, alternative investment opportunities and other considerations. The current program does not require us to repurchase a minimum number of shares, does not have a fixed term, and may be modified, suspended or terminated at any time without prior notice. We repurchased 7.3 million shares, 3.6 million shares and 6.4 million shares of our common stock during fiscal years 2022, 2021 and 2020, respectively, at an aggregate cost of$1,152.3 million ,$515.1 million and$515.1 million , respectively.
Cash Flows from Operating Activities
Operating activities in fiscal 2022 generated cash of$1,049.2 million , compared to$1,301.9 million in fiscal 2021. This decrease in cash provided by operating activities was primarily due to increased inventory as well as prepayments of certain fees and deposits associated with a long-term capacity reservation agreement. The increased inventory related to the lower demand for 5G handsets fromChina -based OEMs and the build of inventory in anticipation of certain customers' product ramps. These decreases to cash provided by operating activities were partially offset by increased profitability as a result of demand and revenue growth.
Cash Flows from Investing Activities
Net cash used in investing activities in fiscal 2022 was$596.0 million , compared to$218.7 million in fiscal 2021. This increase in cash used in investing activities was primarily due to the acquisitions ofNextInput and United SiC in fiscal 2022, which resulted in net cash outflows of$389.1 million , as compared to the acquisition of 7Hugs Labs S.A.S. in fiscal 2021, which resulted in net cash outflows of$47.7 million . See Note 5 of the Notes to Consolidated Financial Statements for additional information regarding our business acquisitions.
Cash Flows from Financing Activities
Net cash used in financing activities in fiscal 2022 was$875.5 million , compared to$401.9 million in fiscal 2021. This increase in cash used in financing activities was primarily due to stock repurchases. See Note 16 of the Notes to Consolidated Financial Statements for additional information regarding our stock repurchases. Our future capital requirements may differ materially from those currently anticipated and will depend on many factors, including market acceptance of and demand for our products, acquisition opportunities, technological advances and our relationships with suppliers and customers. Based on current and projected levels of cash flows from operations, coupled with our existing cash and cash equivalents and our Credit Facility, we believe that we have sufficient liquidity to meet both our short-term and long-term cash requirements. However, if there is a significant decrease in demand for our products, or if our revenue grows faster than we anticipate, operating cash flows may be insufficient to meet our needs. If existing resources and cash from operations are not sufficient to meet our future requirements or if we perceive conditions to be favorable, we may seek additional debt or equity financing. Additional debt or equity financing could be dilutive to holders of our common stock. Further, we cannot be sure that additional debt or equity financing, if required, will be available on favorable terms, if at all. 39 -------------------------------------------------------------------------------- Table of Contents CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations and
commitments (in thousands) as of
Payments Due By Fiscal Period
Total Payments 2023 2024-2025 2026-2027 2028 and
thereafter
Capital commitments (1) $ 137,176 $ 116,482 $ 20,694 $ - $ -
Purchase obligations (2) 2,019,516 902,162 880,450 236,904 -
Leases 104,886 20,839 30,581 22,062 31,404
Long-term debt obligations (3) 2,586,399 69,587 627,313 133,437 1,756,062
Total $ 4,847,977 $ 1,109,070 $ 1,559,038 $ 392,403 $ 1,787,466
(1) Capital commitments represent obligations for the purchase of property and
equipment, a majority of which are not recorded as liabilities on our
Consolidated Balance Sheet because we had not received the related goods or
services as of April 2, 2022 .
(2) Purchase obligations represent payments due related to the purchase of
materials and manufacturing services, a majority of which are not recorded as
liabilities on our Consolidated Balance Sheet because we had not received the
related goods or services as of April 2, 2022 . See Note 11 of the Notes to
Consolidated Financial Statements for further information.
(3) Long-term debt obligations represent future cash payments of principal and
interest over the life of the 2024 Notes, the 2029 Notes and the 2031 Notes,
including anticipated interest payments not recorded as liabilities on our
Consolidated Balance Sheet as of April 2, 2022 . Debt obligations are classified
based on their stated maturity date, and any future redemptions would impact our
cash payments. See Note 9 of the Notes to Consolidated Financial Statements for
further information.
Other Contractual Obligations
As of April 2, 2022 , in addition to the amounts shown in the contractual
obligations table above, we have $13.8 million of unrecognized income tax
benefits and accrued interest and penalties which has been recorded as a
liability. We are uncertain as to if, or when, such amounts may be settled. We
also have an obligation related to the Transitional Repatriation Tax that we
elected to pay over eight years which has been recorded as a liability. The
remaining obligation of $5.4 million is to be paid over the next four years.
As discussed in Note 10 of the Notes to Consolidated Financial Statements, we
have two pension plans in Germany with a combined benefit obligation of
approximately $12.1 million as of April 2, 2022 . Pension benefit payments are
not included in the schedule above due to the uncertainty regarding the amount
and timing of any future cash outflows. Pension benefit payments were
approximately $0.3 million in fiscal 2022 and are expected to be approximately
$0.3 million in fiscal 2023.
We also offer a non-qualified deferred compensation plan to eligible
participants to defer and invest a specified percentage of their cash
compensation. We record an obligation under the plan for the distributions to be
made to participants upon certain triggering events. Although participants are
required to make distribution elections at the time of enrollment, the amount
and timing of any future cash outflows is uncertain until such triggering events
occur. The total deferred compensation obligation as of April 2, 2022 was $39.4
million , of which $1.5 million is estimated to be paid in fiscal 2023. See Note
10 of the Notes to Consolidated Financial Statements for further information.
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SUPPLEMENTAL PARENT AND GUARANTOR FINANCIAL INFORMATION
In accordance with the indentures governing the 2024 Notes, the 2029 Notes and
the 2031 Notes (together, the "Notes"), our obligations under the Notes are
fully and unconditionally guaranteed on a joint and several unsecured basis by
the Guarantors, which are listed on Exhibit 22 to this Annual Report on Form
10-K. Each Guarantor is 100% owned, directly or indirectly, by Qorvo, Inc.
("Parent"). A Guarantor can be released in certain customary circumstances. Our
other U.S. subsidiaries and our non-U.S. subsidiaries do not guarantee the Notes
(such subsidiaries are referred to as the "Non-Guarantors").
The following presents summarized financial information for the Parent and the
Guarantors on a combined basis as of and for the periods indicated, after
eliminating (i) intercompany transactions and balances among the Parent and
Guarantors, and (ii) equity earnings from, and investments in, any
Non-Guarantor. The summarized financial information may not necessarily be
indicative of the financial position and results of operations had the combined
Parent and Guarantors operated independently from the Non-Guarantors.
Summarized Balance Sheets
(in thousands) April 2, 2022 April 3, 2021
ASSETS
Current assets (1) $ 771,528 $ 1,143,086
Non-current assets $ 2,624,454 $ 2,450,960
LIABILITIES
Current liabilities $ 241,674 $ 240,943
Long-term liabilities (2) $ 2,634,501 $ 2,250,666
(1) Includes net amounts due from Non-Guarantor subsidiaries of
(2) Includes net amounts due to Non-Guarantor subsidiaries of
Summarized Statement of Income Fiscal Year
(in thousands) 2022
Revenue $ 1,126,193
Gross profit $ 268,025
Net loss $ (93,405) CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements requires management to use
judgment and estimates. The level of uncertainty in estimates and assumptions
increases with the length of time until the underlying transactions are
completed. Actual results could materially differ from those estimates. The
accounting policies that are most critical in the preparation of our
consolidated financial statements are those that are both important to the
presentation of our financial condition and results of operations and require
significant judgment and estimates on the part of management. Our critical
accounting policies are reviewed periodically with the Audit Committee of the
Board of Directors. We also have other policies that we consider key accounting
policies; however, these policies typically do not require us to make estimates
or judgments that are difficult or subjective. See Note 1 of the Notes to
Consolidated Financial Statements.
Inventory Reserves. The valuation of inventory requires us to estimate obsolete
or excess inventory. The determination of obsolete or excess inventory requires
us to estimate the future demand for our products within specific time horizons,
generally 12 to 24 months. The estimates of future demand that we use in the
valuation of inventory reserves are the same as those used in our revenue
forecasts and are also consistent with the estimates used in our manufacturing
plans to enable consistency between inventory valuations and build decisions.
Product-specific facts and circumstances reviewed in the inventory
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valuation process include a review of the customer base, market conditions and
customer acceptance of our products and technologies, as well as an assessment
of the selling price in relation to the product cost.
Historically, inventory reserves have fluctuated as new technologies have been
introduced and customers' demand has shifted. Inventory reserves had an impact
on margins of less than 2% in fiscal years 2022 and 2021.
Property and Equipment. Periodically, we evaluate the period over which we
expect to recover the economic value of our property and equipment, considering
factors such as changes in machinery and equipment technology, our ability to
re-use equipment across generations of process technology and historical usage
trends. When we determine that the useful lives of assets are shorter or longer
than we had originally estimated, we adjust the rate of depreciation to reflect
the revised useful lives of the assets.
We assess property and equipment for impairment when events or changes in
circumstances indicate that the carrying value of the assets or the asset group
may not be recoverable. Factors that we consider in deciding when to perform an
impairment review include an adverse change in our use of the assets or an
expectation that the assets will be sold or otherwise disposed. We assess the
recoverability of the assets held and used by comparing the projected
undiscounted net cash flows associated with the related asset or group of assets
over their remaining estimated useful lives against their respective carrying
amounts. Assets identified as "held for sale" are recorded at the lesser of
their carrying value or their fair market value less costs to sell. Impairment,
if any, is based on the excess of the carrying amount over the fair value of
those assets. The process of evaluating property and equipment for impairment
is highly subjective and requires significant judgment as we are required to
make assumptions about items such as future demand for our products and industry
trends.
Business Acquisitions. We allocate the fair value of the purchase price to the
assets acquired and liabilities assumed based on their estimated fair value. The
excess of the purchase price over the fair values of the identifiable assets and
liabilities is recorded to goodwill. Goodwill is assigned to the reporting unit
that is expected to benefit from the synergies of the business combination.
A number of assumptions, estimates and judgments are used in determining the
fair value of acquired assets and liabilities, particularly with respect to the
intangible assets acquired. The valuation of intangible assets requires the use
of valuation techniques such as the income approach. The income approach
includes management's estimation of future cash flows (including expected
revenue growth rates and profitability), the underlying product or technology
life cycles and the discount rates applied to future cash flows.
Judgment is also required in estimating the fair values of deferred tax assets
and liabilities, uncertain tax positions and tax-related valuation allowances,
which are initially estimated as of the acquisition date, as well as inventory,
property and equipment, pre-existing liabilities or legal claims, deferred
revenue and contingent consideration, each as may be applicable.
While we use our best estimates and assumptions to accurately value assets
acquired and liabilities assumed at the acquisition date as well as contingent
consideration, where applicable, our estimates are inherently uncertain and
subject to refinement. As a result, during the measurement period, which may be
up to one year from the acquisition date, we may record adjustments to the
assets acquired and liabilities assumed with the corresponding offset to
goodwill. After the measurement period, any purchase price adjustments are
recognized in our Consolidated Statements of Income.
Goodwill Impairment Testing. In accordance with ASC 350, "Intangibles - Goodwill
and Other" ("ASC 350"), goodwill is not amortized, but rather is reviewed for
impairment at the reporting unit level on the first day of our fourth quarter of
each fiscal year, or when there is evidence that events or changes in
circumstances indicate that the carrying amount of the goodwill may not be
recovered.
Under ASC 350, we have the option to first assess qualitatively whether it is
more likely than not that the fair value of a reporting unit is less than its
carrying amount, including goodwill.
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We establish our reporting units based on our current organizational structure,
product and technology characteristics and segment management's view of the
business. As of January 2, 2022 , we identified three reporting units within the
MP operating segment and two reporting units within the IDP operating segment,
and we performed the optional qualitative assessment to determine whether the
existence of events or circumstances indicated that it was more likely than not
that the fair value of each reporting unit was less than its respective carrying
value.
In performing qualitative assessments, we consider (i) our overall historical
and projected future operating results, (ii) if there was a significant decline
in our stock price for a sustained period, (iii) if there was a significant
change in our market capitalization relative to our net book value, and (iv) if
there was a prolonged or more significant slowdown in the worldwide economy of
the semiconductor industry, as well as other relevant events and factors
affecting the reporting unit.
In fiscal 2022, we completed our annual qualitative assessments and concluded
that based on the relevant events and circumstances, it was more likely than not
that four of our five reporting units' fair values exceeded their related
carrying values. However, for one of our MP reporting units (the acquired
NextInput business), it was determined that the market adoption of the acquired
technology into mobile handsets is expected to be delayed compared to the
previous assumptions. Therefore, we determined that it was more likely than not
that the fair value of the reporting unit was less than its carrying amount, and
we performed a quantitative assessment to calculate the fair value of the
reporting unit.
Our quantitative assessment considered both the income and market approaches to
estimate the fair value of the reporting unit. The income approach is based on
the discounted cash flow method that uses estimates of the reporting unit's
forecasted future financial performance including revenues, operating expenses,
taxes and capital expenditures. These estimates are developed as part of our
long-term planning process based on assumed market segment growth rates and our
assumed market segment share, estimated costs based on historical data and
various internal estimates. Projected cash flows are then discounted to a
present value employing a discount rate that properly accounts for the estimated
market weighted-average cost of capital, as well as any risk unique to the cash
flows. The market approach is based on financial multiples (i.e., multiples of
revenue or earnings before income taxes, depreciation and amortization) of
comparable companies.
Based on the quantitative assessment performed, we determined that the carrying
amount of the reporting unit exceeded its fair value, which resulted in a
goodwill impairment charge of approximately $48.0 million . The goodwill
impairment charge is recorded in "Other operating expense" in the Statement of
Income for the fiscal year ended April 2, 2022 .
Inherent in the fair value determination are significant judgments and
estimates, including assumptions about our future revenue, profitability and
cash flows, our operational plans and our interpretation of current economic
indicators and market valuations. To the extent these assumptions are incorrect
or there are further declines in our business outlook, additional goodwill
impairment charges may be recorded in future periods.
In fiscal 2021, we completed qualitative assessments and concluded that based on
the relevant events and circumstances, it was more likely than not that each of
the reporting unit's fair value exceeded its related carrying value, and no
further impairment testing was required.
Identified Intangible Assets. We amortize definite-lived intangible assets
(including developed technology, customer relationships, technology licenses,
backlog and trade names) over their estimated useful lives. In-process research
and development ("IPRD") assets represent the fair value of incomplete R&D
projects that had not reached technological feasibility as of the date of the
acquisition; initially, these are classified as IPRD and are not subject to
amortization. Upon completion of development, IPRD assets are transferred to
developed technology and are amortized over their useful lives. The asset
balances relating to abandoned projects are impaired and expensed to R&D.
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We evaluate definite-lived intangible assets for impairment in accordance with
ASC 360-10-35, "Impairment or Disposal of Long-Lived Assets" to determine
whether facts and circumstances (including external factors such as industry and
economic trends and internal factors such as changes in our business strategy
and forecasts) indicate that the carrying amount of the assets may not be
recoverable. If such facts and circumstances exist, we assess the recoverability
of identified intangible assets by comparing the projected undiscounted net cash
flows associated with the related asset or group of assets over their remaining
lives against their respective carrying amounts. Impairments, if any, are based
on the excess of the carrying amounts over the fair value of those assets and
occur in the period in which the impairment determination was made.
In connection with completing our fiscal 2022 annual goodwill impairment
assessment, we also evaluated our long-lived intangible assets and determined
that the forecasted undiscounted net cash flows related to these assets were in
excess of their carrying values. No definite-lived intangible asset impairment
charges were recorded for fiscal years 2022 or 2021.
Revenue Recognition. We generate revenue primarily from the sale of
semiconductor products, either directly to a customer or to a distributor, or at
completion of a consignment process. Revenue is recognized when control of the
promised goods or services is transferred to our customers, in an amount that
reflects the consideration we expect to be entitled in exchange for those goods
or services. A majority of our revenue is recognized at a point in time, either
on shipment or delivery of the product, depending on individual customer terms
and conditions. Revenue from sales to our distributors is recognized upon
shipment of the product to the distributors (sell-in). Revenue is recognized
from our consignment programs at a point in time when the products are pulled
from consignment inventory by the customer. Revenue recognized for products and
services over-time is immaterial (less than 3% of overall revenue). We apply a
five-step approach as defined in ASC 606, "Revenue from Contracts with
Customers," in determining the amount and timing of revenue to be recognized:
(1) identifying the contract with a customer; (2) identifying the performance
obligations in the contract; (3) determining the transaction price; (4)
allocating the transaction price to the performance obligations in the contract;
and (5) recognizing revenue when the corresponding performance obligation is
satisfied.
Sales agreements are in place with certain customers and contain terms and
conditions with respect to payment, delivery, warranty and supply, but typically
do not require minimum purchase commitments. In the absence of a sales
agreement, our standard terms and conditions apply. We consider a customer's
purchase order, which is governed by a sales agreement or our standard terms and
conditions, to be the contract with the customer.
Our pricing terms are negotiated independently, on a stand-alone basis. In
determining the transaction price, we evaluate whether the price is subject to a
refund or adjustment to determine the net consideration to which we expect to be
entitled. Variable consideration in the form of rebate programs is offered to
certain customers, including distributors, and represents less than 7% of net
revenue. We determine variable consideration by estimating the most likely
amount of consideration we expect to receive from the customer. Our terms and
conditions do not give our customers a right of return associated with the
original sale of our products. However, we may authorize sales returns under
certain circumstances, which include courtesy returns and like-kind exchanges.
We reduce revenue and record reserves for product returns and allowances, rebate
programs and scrap allowance based on historical experience or specific
identification depending on the contractual terms of the arrangement.
Our accounts receivable balance is from contracts with customers and represents
our unconditional right to receive consideration from our customers. Payments
are due upon completion of the performance obligation and subsequent invoicing.
Substantially all payments are collected within our standard terms, which do not
include any financing components. To date, there have been no material
impairment losses on accounts receivable. Contract assets and contract
liabilities recorded on the Consolidated Balance Sheets were immaterial as of
April 2, 2022 and April 3, 2021 .
We invoice customers upon shipment and recognize revenues in accordance with
delivery terms. As of
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Table of Contents duration greater than one year, of which the majority is expected to be recognized as income over the next 12 months.
We include shipping charges billed to customers in "Revenue" and include the related shipping costs in "Cost of goods sold" in the Consolidated Statements of Income. Taxes assessed by government authorities on revenue-producing transactions, including tariffs, value-added and excise taxes, are excluded from revenue in the Consolidated Statements of Income. We incur commission expense that is incremental to obtaining contracts with customers. Sales commissions (which are recorded in the "Selling, general and administrative" expense line item in the Consolidated Statements of Income) are expensed when incurred because such commissions are not owed until the performance obligation is satisfied, which coincides with the end of the contract term; therefore, no remaining period exists over which to amortize the commissions. Income Taxes. In determining income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax expense, the resultant tax liabilities and the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. As part of our financial process, we assess on a tax jurisdictional basis the likelihood that our deferred tax assets can be recovered. If recovery is not more likely than not (a likelihood of less than 50 percent), the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to ultimately be recoverable. In this process, certain relevant criteria are evaluated including: the amount of income or loss in prior years, the existence of deferred tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior carryback years that can be used to absorb net operating losses and credit carrybacks, future expected taxable income and prudent and feasible tax planning strategies. Changes in taxable income, market conditions,U.S. or international tax laws and other factors may change our judgment regarding whether we will be able to realize the deferred tax assets. These changes, if any, may require material adjustments to the net deferred tax assets and an accompanying reduction or increase in income tax expense which will result in a corresponding increase or decrease in net income in the period when such determinations are made. See Note 13 of the Notes to Consolidated Financial Statements for additional information regarding changes in the valuation allowance and net deferred tax assets. As part of our financial process, we also assess the likelihood that our tax reporting positions will ultimately be sustained. To the extent it is determined it is more likely than not (a likelihood of more than 50 percent) that some portion, or all, of a tax reporting position will ultimately not be recognized and sustained, a provision for unrecognized tax benefit is provided by either reducing the applicable deferred tax asset or accruing an income tax liability. Our judgment regarding the sustainability of our tax reporting positions may change in the future due to changes inU.S. or international tax laws and other factors. These changes, if any, may require material adjustments to the related deferred tax assets or accrued income tax liabilities and an accompanying reduction or increase in income tax expense which will result in a corresponding increase or decrease in net income in the period when such determinations are made. See Note 13 of the Notes to Consolidated Financial Statements for additional information regarding our uncertain tax positions and the amount of unrecognized tax benefits.
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