The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with our interim unaudited condensed consolidated financial statements and the accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this "Quarterly Report"), and the "Special Note Regarding Forward-Looking and Cautionary Statements" in this Quarterly Report.
Overview
Semtech Corporation (together with its consolidated subsidiaries, the "Company", "we", "our", or "us") designs, develops, manufactures and markets high-performance analog and mixed signal semiconductors and advanced algorithms. We account for results in two reportable segments-theHigh-Performance Analog Group and theSystem Protection Group .The High-Performance Analog Group is comprised of our Signal Integrity and Wireless and Sensing product lines, which represent two operating segments.The System Protection Group is comprised of our Protection product line, which represents a separate operating segment. Signal Integrity. We design, develop, manufacture and market a portfolio of optical data communications and video transport products used in a wide variety of infrastructure and industrial applications. Our comprehensive portfolio of integrated circuits ("ICs") for data centers, enterprise networks, passive optical networks ("PON"), and wireless base station optical transceivers and high-speed interfaces ranges from 100Mbps to 400Gbps and supports key industry standards such as Fibre Channel, Infiniband, Ethernet, PON and synchronous optical networks. Our video products offer advanced solutions for next generation high-definition broadcast applications, as well as highly differentiated video-over-IP technology for professional audio video applications. Wireless and Sensing. We design, develop, manufacture and market a portfolio of specialized radio frequency products used in a wide variety of industrial, medical and communications applications, and specialized sensing products used in industrial and consumer applications. Our wireless products, which include our LoRa® devices and wireless radio frequency technology, feature industry leading and longest range industrial, scientific and medical radio, enabling a lower total cost of ownership and increased reliability in all environments. These features make these products particularly suitable for machine to machine and Internet-of-Things ("IoT") applications. Our unique sensing technology enables proximity sensing and advanced user interface solutions for our mobile and consumer products. Our wireless and sensing products can be found in a broad range of applications in the industrial, medical, and consumer markets. We also design, develop, and market power product devices that control, alter, regulate, and condition the power within electronic systems focused on the LoRa and IoT infrastructure segment. The highest volume product types within this category are switching voltage regulators, combination switching and linear regulators, smart regulators, isolated switches, and wireless charging. Protection. We design, develop, manufacture and market high-performance protection devices, which are often referred to as transient voltage suppressors ("TVS"). TVS devices provide protection for electronic systems where voltage spikes (called transients), such as electrostatic discharge, electrical over stress or secondary lightning surge energy, can permanently damage sensitive ICs. Our portfolio of protection solutions include filter and termination devices that are integrated with the TVS device. Our products provide robust protection while preserving signal integrity in high-speed communications, networking and video interfaces. These products also operate at very low voltage. Our protection products can be found in a broad range of applications including smart phones, LCD and organic light-emitting diode TVs and displays, set-top boxes, monitors and displays, tablets, computers, notebooks, base stations, routers, automobile and industrial systems.
Our interim unaudited condensed consolidated balance sheets are referred to herein as the "Balance Sheets" and interim unaudited condensed consolidated statements of income are referred to herein as the "Statements of Income."
Our net sales by product line were as follows:
Three Months Ended (in thousands) May 1, 2022 May 2, 2021 Signal Integrity $ 79,302$ 66,695 Wireless and Sensing 67,299 58,507 Protection 55,548 45,170 Total $ 202,149$ 170,372
We design, develop and market a wide range of products for commercial applications, the majority of which are sold into the infrastructure, high-end consumer and industrial end markets.
Infrastructure: data centers, PON, base stations, optical networks, servers, carrier networks, switches and routers, cable modems, wireless local area network ("LAN") and other communication infrastructure equipment.
High-End Consumer: smartphones, tablets, wearables, desktops, notebooks, and other handheld products, wireless charging, set-top boxes, digital televisions, monitors and displays, digital video recorders and other consumer equipment. 28 -------------------------------------------------------------------------------- Industrial: IoT applications, analog and digital video broadcast equipment, video-over-IP solutions, automated meter reading, smart grid, wireless charging, medical, security systems, automotive, industrial and home automation and other industrial equipment.
Our end customers are primarily original equipment manufacturers that produce and sell electronics.
Recent Developments OnMay 3, 2022 , we completed the divestiture of our high reliability discrete diodes and assemblies business (the "Disposal Group ") toMicross Components, Inc. for approximately$30 million in an all-cash transaction. See Note 2, Divestitures, for additional information.
Impact of COVID-19 and Macroeconomic Conditions
The COVID-19 pandemic has significantly affected health and economic conditions throughoutthe United States ("U.S.") and the rest of the world includingAsia , where a significant percentage of our customers, suppliers, third party foundries and subcontractors are located. As a result of the pandemic, certain of our facilities and the third-party foundries and assembly and test contractors to which we outsource our manufacturing functions, have had to periodically reduce or suspend operations. The disruption experienced during such closures has resulted in reduced production of our products, delays for delivery of our products to our customers, and reduced ability to receive supplies, which have had and may continue to have, individually and in the aggregate, an adverse effect on our results. Currently, customer demand remains strong and supply tight, with many of our suppliers running at or near capacity and our customers competing for limited inventory. While we have increased our inventory levels to prepare for our strong backlog of orders, higher demand and to minimize the impact of potential supply shortages, we cannot provide assurance that we will have sufficient inventory if this high level of demand is sustained over the longer term. In addition, the prices to obtain raw materials and convert them into the necessary inventory have increased in certain cases, and may continue to increase, including due to current inflationary pressures. While we have been largely successful with passing on selective price increases to our customers, we cannot provide assurance that all future potential price increases can be absorbed through increased pricing to our customers. We believe we have good visibility going into the second quarter of fiscal year 2023; however, it is unknown how much of the increased demand reflects real end market strength. We believe the general supply chain constraints in the industry may be motivating certain customers to increase their orders and inventory levels to protect against supply risk. To the extent that this cautionary purchasing is occurring, we could experience a decrease in future demand as potential excess inventory is worked down.
Factors Affecting Our Performance
Most of our sales to customers are made on the basis of individual customer purchase orders. Many customers include cancellation provisions in their purchase orders. As a result of current macro conditions where demand is exceeding supply and we are seeing global shortages, lead times may continue to expand, resulting in fewer orders being shipped and received in the same quarter. Orders received and shipped in the first quarters of fiscal years 2023 and 2022 represented 1% and 18% of net sales, respectively. Sales made directly to customers during the first quarters of fiscal years 2023 and 2022 were 11% and 14% of net sales, respectively. The remaining sales were made through independent distributors. The decline in direct sales is due to customers electing to leverage the value of distribution to better manage their supply chain. Our business relies on foreign-based entities. Many of our third-party subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries or territories includingTaiwan andChina . Foreign sales constituted approximately 88% and 89% of our net sales during the first quarters of fiscal years 2023 and 2022, respectively. Approximately 76% and 78% of our sales during the first quarters of fiscal years 2023 and 2022, respectively, were to customers located in theAsia-Pacific region . The remaining foreign sales were primarily to customers inEurope ,Canada andMexico . Doing business in foreign locations also subjects us to export restrictions and trade laws, which may limit our ability to sell to certain customers. We use several metrics as indicators of future potential growth. The indicators that we believe best correlate to potential future sales growth are design wins and new product releases. There are many factors that may cause a design win or new product release not to result in sales, including a customer's decision not to go to system production, a change in a customer's perspective regarding a product's value or a customer's product failing in the end market. As a result, although a design win or new product introduction is an important step towards generating future sales, it does not inevitably result in us being awarded business or receiving a purchase commitment. Inflationary factors have not had a significant effect on our performance over the past several years. A significant increase in inflation would affect our future performance if we were unable to pass these higher costs on to our customers. 29 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth, for the periods indicated, our interim unaudited condensed consolidated statements of income expressed as a percentage of net sales. Three Months Ended May 1, 2022 May 2, 2021 Net sales 100.0 % 100.0 % Cost of sales 35.6 % 38.5 % Gross profit 64.4 % 61.5 % Operating costs and expenses: Selling, general and administrative 21.5 % 22.8 % Product development and engineering 19.2 % 21.6 % Intangible amortization 0.5 % 0.8 % Total operating costs and expenses 41.2 % 45.1 % Operating income 23.3 % 16.4 % Interest expense (0.6) % (0.7) % Non-operating income, net 0.1 % 0.1 % Investment impairments and credit loss reserves - % (0.1) %
Income before taxes and equity in net gains of equity method investments
22.8 % 15.6 % Provision for income taxes 4.0 % 1.9 %
Net income before equity in net gains of equity method investments
18.8 % 13.7 % Equity in net gains of equity method investments - % - % Net income 18.8 % 13.8 % Net loss attributable to noncontrolling interest - % - % Net income attributable to common stockholders 18.8 % 13.8 %
Percentages may not add precisely due to rounding.
Our regional mix of income (loss) before taxes and equity in net gains (losses) of equity method investments was as follows:
Three Months Ended (in thousands) May 1, 2022 May 2, 2021 Domestic$ (4,782) $ (5,484) Foreign 50,875 32,102 Total$ 46,093 $ 26,618
Domestic performance includes higher levels of share-based compensation compared to foreign operations.
Comparison of the Three Months Ended
The following table summarizes our net sales by major end market:
Three Months Ended (in thousands, except percentages) May 1, 2022 May 2, 2021 Infrastructure$ 76,194 37 %$ 61,350 36 % High-End Consumer 47,826 24 % 53,816 32 % Industrial 78,129 39 % 55,206 32 % Total$ 202,149 100 %$ 170,372 100 % Net sales for the first quarter of fiscal year 2023 were$202.1 million , an increase of 18.7% compared to$170.4 million for the first quarter of fiscal year 2022. Net sales from our industrial end market increased$22.9 million versus the prior year primarily due to an approximately$19 million increase in LoRa-enabled product sales led by an increase in pico gateways. We experienced an increase of$14.8 million in net sales from our infrastructure end market, primarily driven by an approximately$14 million increase in PON sales. Net sales from our high-end consumer end market decreased$6.0 million primarily driven 30 --------------------------------------------------------------------------------
by an approximately
Based on booking trends and our backlog entering the quarter, we estimate net sales for the second quarter of fiscal year 2023 to be between$203.0 million and$213.0 million . The range of guidance reflects continued uncertainty regarding macro-related events and those associated with the COVID-19 pandemic discussed above.
The following table summarizes our net sales by reportable segment:
Three Months Ended (in thousands, except percentages) May 1, 2022 May 2, 2021 Net Sales % Net Sales Net Sales % Net Sales Change High-Performance Analog Group$ 146,601 73 %$ 125,202 73 % 17 % System Protection Group 55,548 27 % 45,170 27 % 23 % Total$ 202,149 100 %$ 170,372 100 % 19 % Net sales from ourHigh-Performance Analog Group increased$21.4 million in the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022 primarily driven by an approximately$19 million increase in LoRa-enabled product sales led by an increase in pico gateways and an approximately$14 million increase in PON sales, partially offset by an approximately$11 million decline in proximity sensing products. Net sales from ourSystem Protection Group increased$10.4 million in the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022 primarily driven by an approximately$7 million increase in industrial automation and automotive sales and an approximately$3 million increase in TVS consumer product sales, including wearables, mobile computers and smartphones.
Gross Profit
The following table summarizes our gross profit and gross margin by reportable segment: Three Months Ended (in thousands, except percentages) May 1, 2022 May 2, 2021 Gross Profit
Gross Margin Gross Profit
$ 102,061 69.6 %$ 83,080 66.4 % System Protection Group 29,187 52.5 % 22,741 50.3 %
Unallocated costs, including share-based compensation (995)
(960) Total$ 130,253 64.4 %$ 104,861 61.5 % In the first quarter of fiscal year 2023, gross profit increased to$130.3 million from$104.9 million in the first quarter of fiscal year 2022 as a result of higher sales. This increase included a$19.0 million increase from ourHigh-Performance Analog Group and a$6.4 million increase from ourSystem Protection Group , both of which experienced higher demand and implemented price increases to offset higher manufacturing costs during the first quarter of fiscal year 2023. Our gross margin was 64.4% in the first quarter of fiscal year 2023, compared to 61.5% in the first quarter of fiscal year 2022. Gross margin in ourHigh-Performance Analog Group was 69.6% in the first quarter of fiscal year 2023, compared to 66.4% in the first quarter of fiscal year 2022, reflecting higher margins in 10G PON and 2.5G PON, as well as a favorable product mix related to LoRa-enabled products. Gross margin in ourSystem Protection Group was 52.5% in the first quarter of fiscal year 2023, compared to 50.3% in the first quarter of fiscal year 2022, reflecting a more favorable industrial automation and automotive product mix. The majority of our manufacturing is outsourced, resulting in relatively low fixed manufacturing costs and variable costs that highly correlate with volume. For the second quarter of fiscal year 2023, we expect our gross margins to be in the range of 64.1% to 65.5%. Despite the capacity constraints within the industry, we expect overall gross profit for the second quarter of fiscal year 2023 to benefit from continued revenue growth. We have increased our inventory levels to try to meet the strong backlog of orders and higher demand, as well as to minimize the impact of potential supply shortages. 31 --------------------------------------------------------------------------------
Operating Costs and Expenses
Three Months Ended (in thousands, except percentages) May 1, 2022 May 2, 2021 Change Selling, general and administrative$ 43,364 52 %$ 38,804 50 % 12 % Product development and engineering 38,789 47 % 36,790 48 % 5 % Intangible amortization 1,048 1 %
1,298 2 % (19) %
Total operating costs and expenses
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased$4.6 million in the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022 primarily as a result of a$1.8 million increase in performance-based compensation, which is comprised of bonus and share-based compensation, a$0.7 million increase in transaction costs including costs related to the divestiture of our high reliability discrete diodes and assemblies business inMay 2022 , a$0.5 million increase in depreciation expense and a$0.5 million increase in our environmental reserve.
Product Development and Engineering Expenses
Product development and engineering expenses increased$2.0 million in the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022 primarily as a result of a$3.1 million increase in staffing-related costs, including performance-based compensation, partially offset by a$1.6 million decrease in operating supplies and contracted research, as well as fluctuations in the timing of development activities. The levels of product development and engineering expenses reported in a fiscal period can be significantly impacted, and therefore experience period over period volatility, by the number of new product tape-outs and by the timing of recoveries from non-recurring engineering services, which are typically recorded as a reduction to product development and engineering expense. Intangible Amortization Intangible amortization was$1.0 million and$1.3 million for the first quarters of fiscal years 2023 and 2022, respectively. This decrease was primarily due to certain finite-lived intangible assets associated with the acquisition ofTrackio International AG , which became fully amortized during fiscal year 2022.
Interest Expense
Interest expense, including amortization of debt discounts and issuance costs, remained flat at$1.2 million for the first quarters of fiscal years 2023 and 2022.
Investment Impairments and Credit Loss Reserves
During the first quarter of fiscal year 2023, investment impairments and credit loss reserves totaled a loss of$0.02 million due to adjustments to our credit loss reserve for our available-for-sale debt securities, and we did not record any impairments on our non-marketable equity investments. During the first quarter of fiscal year 2022, investment impairments and credit loss reserves totaled a loss of$0.2 million due to adjustments to our credit loss reserve for our available-for-sale debt securities, and we did not record any impairments on our non-marketable equity investments.
Provision for Income Taxes
The effective tax rates for the first quarters of fiscal years 2023 and 2022 were provision rates of 17.5% and 12.0%, respectively. In the first quarter of fiscal year 2023, we recorded income tax expense of$8.1 million , compared to$3.2 million in the first quarter of fiscal year 2022. The increase to our effective tax rate for the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022 was mainly due to an increase in global intangible low-taxed income ("GILTI"), driven by the capitalization of research and development ("R&D") costs as mandated by The Tax Cuts and Jobs Act. The effective tax rates in the first quarters of fiscal years 2023 and 2022 differ from the statutory federal income tax rate of 21% primarily due to a regional mix of income, impact of GILTI and R&D tax credits. We have elected to treat GILTI as a period cost and the additional capitalization of R&D costs within GILTI increases our provision for income taxes. As a global organization, we are subject to audit by taxing authorities in various jurisdictions. To the extent that an audit, or the closure of a statute of limitations, results in adjusting our reserves for uncertain tax positions, our effective tax rate could experience extreme volatility since any adjustment would be recorded as a discrete item in the period of adjustment.
Liquidity and Capital Resources
Our capital requirements depend on a variety of factors including, but not limited to, the rate of increase or decrease in our existing business base; the success, timing and amount of investment required to bring new products to market; sales growth or decline; potential acquisitions; the general economic environment in which we operate; and our ability to generate cash flow from operations, which are more uncertain as a result of the COVID-19 pandemic and its impact on the general economy. Our 32 -------------------------------------------------------------------------------- liquidity needs during this uncertain time will depend on multiple factors, including our ability to continue operations and production of our products, given the global supply constraints, the COVID-19 pandemic's effect on our customers, the availability of sufficient amounts of financing and our operating performance. We believe that our cash on hand, cash available from future operations and available borrowing capacity under our Credit Facility (as defined below) are sufficient to meet liquidity requirements for at least the next 12 months, including funds needed for our material cash requirements. As ofMay 1, 2022 , we had$275.2 million in cash and cash equivalents and$417.0 million of undrawn capacity on our Credit Facility (as defined below). In addition, onMay 3, 2022 , we sold our high reliability discrete diodes and assemblies business for approximately$30 million in an all-cash transaction. Over the longer-term, we believe our strong cash-generating business model will continue to provide adequate liquidity to fund our normal operations, which have minimal capital intensity. To the extent that we enter into acquisitions or strategic partnerships, we may be required to raise additional capital through debt issuances or equity offerings. In addition, we expect to refinance our Credit Facility ahead of its maturity inNovember 2024 . While we have not had issues securing favorable financing historically, there is no assurance that we will be able to refinance or secure additional capital at favorable terms, or at all in the future. A meaningful portion of our capital resources, and the liquidity they represent, are held by our foreign subsidiaries. As ofMay 1, 2022 , our foreign subsidiaries held approximately$256.5 million of cash and cash equivalents, compared to$221.9 million atJanuary 30, 2022 . We expect our future cash uses will be for capital expenditures, repurchases of our common stock, debt repayment and potentially, acquisitions and other investments that support achievement of our business strategies. We expect to fund those cash requirements through our cash from operations and borrowings against our Credit Facility.
Credit Facility
OnNovember 7, 2019 , we, with certain of our domestic subsidiaries as guarantors, entered into an amended and restated credit agreement (the "Credit Agreement") with the lenders party thereto andHSBC Bank USA, National Association , as administrative agent, swing line lender and letter of credit issuer. The Credit Agreement provides$600.0 million in borrowing capacity of revolving loans under the senior secured first lien credit facility (the "Credit Facility"). The Credit Facility matures onNovember 7, 2024 . In the first three months of fiscal year 2023, we borrowed$10.0 million against our Credit Facility. In the first three months of fiscal year 2022, we made payments on our Credit Facility that totaled$4.0 million . As ofMay 1, 2022 , we had$183.0 million of outstanding borrowings against our Credit Facility, which had$417.0 million of undrawn capacity. The Credit Agreement provides that, subject to certain customary conditions, including obtaining commitments with respect thereto, we may request the establishment of one or more term loan facilities and/or increases to the revolving loans in a principal amount not to exceed (a)$300.0 million , plus (b) an unlimited amount, so long as our consolidated leverage ratio, determined on a pro forma basis, does not exceed 3.00 to 1.00. However, the lenders are not required to provide such increase upon our request. Interest on loans made under the Credit Facility inU.S. Dollars accrues, at our option, at a rate per annum equal to (1) the Base Rate (as defined below) plus a margin ranging from 0.25% to 1.25% depending upon our consolidated leverage ratio or (2) LIBOR (determined with respect to deposits inU.S. Dollars) for an interest period to be selected by us plus a margin ranging from 1.25% to 2.25% depending upon our consolidated leverage ratio (such margin, the "Applicable Margin"). The "Base Rate" is equal to a fluctuating rate equal to the highest of (a) the prime rate of the Administrative Agent, (b) 0.50% above the federal funds effective rate published by theFederal Reserve Bank of New York and (c) one-month LIBOR (determined with respect to deposits inU.S. Dollars), plus 1.00%. Interest on loans made under the Credit Facility in Alternative Currencies (as defined in the Credit Agreement) accrues at a rate per annum equal to LIBOR (determined with respect to deposits in the applicable Alternative Currency) (other than loans made in Canadian Dollars, for which a special reference rate for Canadian Dollars applies) for an interest period to be selected by us plus the Applicable Margin. In the first quarter of fiscal year 2021, we entered into an interest rate swap agreement with a three-year term to hedge the variability of interest payments on the first$150.0 million of debt outstanding under our Credit Facility. Based on our current leverage ratio as ofMay 1, 2022 , interest payments on the first$150.0 million of debt outstanding under our Credit Facility are fixed at 1.9775%. All of our obligations under the Credit Agreement are unconditionally guaranteed by all of our direct and indirect domestic subsidiaries, other than certain excluded subsidiaries, including, but not limited to, any domestic subsidiary the primary assets of which consist of equity or debt of non-U.S. subsidiaries, certain immaterial non-wholly-owned domestic subsidiaries and subsidiaries that are prohibited from providing a guarantee under applicable law or that would require governmental approval to provide such guarantee. The Company and the guarantors have also pledged substantially all of their assets to secure their obligations under the Credit Agreement. 33 --------------------------------------------------------------------------------
No amortization is required with respect to the revolving loans and we may voluntarily prepay borrowings at any time and from time to time, without premium or penalty, other than customary "breakage costs" and fees for LIBOR-based loans.
The Credit Agreement contains customary covenants, including limitations on our ability to, among other things, incur indebtedness, create liens on assets, engage in certain fundamental corporate changes, make investments, repurchase stock, pay dividends or make similar distributions, engage in certain affiliate transactions, or enter into agreements that restrict our ability to create liens, pay dividends or make loan repayments. In addition, we must comply with financial covenants, including maintaining a maximum consolidated leverage ratio, determined as of the last day of each fiscal quarter, of 3.50 to 1.00 or less, provided that, such maximum consolidated leverage ratio may be increased to 4.00 to 1.00 for the four consecutive fiscal quarters ending on or after the date of consummation of a permitted acquisition that constitutes a "Material Acquisition" under the Credit Agreement, subject to the satisfaction of certain conditions. As ofMay 1, 2022 , we were in compliance with the covenants in our Credit Agreement. The Credit Agreement also contains customary provisions pertaining to events of default. If any event of default occurs, the obligations under the Credit Agreement may be declared due and payable, terminated upon written notice to us and existing letters of credit may be required to be cash collateralized. OnAugust 11, 2021 , we entered into an amendment to the Credit Agreement in order to, among other things, (i) provide for contractual fallback language for LIBOR replacement to reflect the Alternative Reference Rates Committee hardwired approach and (ii) incorporate certain provisions that clarify the rights of the administrative agent to recover from lenders or other secured parties erroneous payments made to such lenders or secured parties.
Capital Expenditures and Research and Development
We incur significant expenditures in order to fund the development, design and manufacture of new products. We intend to continue to focus on those areas that have shown potential for viable and profitable market opportunities, which may require additional investment in equipment and the hiring of additional design and application engineers aimed at developing new products. Certain of these expenditures, particularly the addition of design engineers, do not generate significant payback in the short-term. We plan to finance these expenditures with cash generated by our operations and our existing cash balances.
Purchases under our Stock Repurchase Program
We currently have in effect a stock repurchase program that was initially approved by our Board of Directors inMarch 2008 . This program represents one of our principal efforts to return value to our stockholders. We repurchased 762,093 shares of our common stock under this program in the first three months of fiscal year 2023 for$50.0 million . In the first three months of fiscal year 2022, we repurchased 360,942 shares under this program for$25.0 million . As ofMay 1, 2022 , the remaining authorization under this program was$209.4 million . We intend to fund repurchases under the program from cash on hand and borrowings on our Credit Facility. We have no obligation to repurchase any shares under the program and may suspend or discontinue it at any time.
Working Capital
Working capital, defined as total current assets less total current liabilities, fluctuates depending on end-market demand and our effective management of certain items such as receivables, inventory and payables. In times of escalating demand, our working capital requirements may increase as we purchase additional manufacturing materials and increase production. In addition, our working capital may be affected by potential acquisitions and transactions involving our debt instruments. Although investments made to fund working capital will reduce our cash balances, these investments are necessary to support business and operating initiatives. Our working capital, excluding cash and cash equivalents, was$109.8 million and$94.3 million as ofMay 1, 2022 andJanuary 30, 2022 , respectively. Our working capital, including cash and cash equivalents, was$385.0 million and$373.9 million as ofMay 1, 2022 andJanuary 30, 2022 , respectively.
Cash Flows
One of our primary goals is to continually improve the cash flows from our existing operating activities. Additionally, we will continue to seek to maintain and improve our existing business performance with capital expenditures and, potentially, acquisitions and other investments that support achievement of our business strategies. Acquisitions may be made for either cash or stock consideration, or a combination of both. 34 --------------------------------------------------------------------------------
In summary, our cash flows for each period were as follows:
Three Months Ended (in thousands) May 1, 2022 May 2, 2021
Net cash provided by operating activities
(10,315)
(8,655)
Net cash used in financing activities (44,153)
(34,602)
Net decrease in cash and cash equivalents
Operating Activities
Net cash provided by operating activities is driven by net income adjusted for non-cash items and fluctuations in operating assets and liabilities.
Operating cash flows for the first three months of fiscal year 2023 compared to the first three months of fiscal year 2022 were favorably impacted by an 18.7% increase in net sales and unfavorably impacted by a$7.1 million incremental increase in inventory spend. Investing Activities
Net cash used in investing activities was primarily attributable to capital expenditures, premiums paid for corporate-owned life insurance and purchases of investments, offset by proceeds from corporate-owned life insurance.
Capital expenditures were$8.3 million for the first three months of fiscal year 2023, compared to$5.8 million for the first three months of fiscal year 2022. In the first three months of fiscal years 2023 and 2022, we made significant investments to update and expand our production capabilities. In the first three months of fiscal year 2023, we paid$2.0 million for strategic investments, including investments in companies that are enabling the LoRa and LoRaWAN®-based ecosystem, compared to$2.9 million of investments in the first three months of fiscal year 2022. In the first three months of fiscal year 2023, we received$2.7 million of proceeds from a corporate-owned life insurance death benefit, which included a$1.6 million gain. All$2.7 million of the proceeds were re-invested into our corporate-owned life insurance policy in order to provide substantive coverage for our deferred compensation liability.
Financing Activities
Net cash used in financing activities is primarily attributable to repurchases of outstanding common stock, payments related to employee share-based compensation payroll taxes and payments on our Credit Facility, offset by proceeds from stock option exercises.
In the first three months of fiscal year 2023, we paid$4.6 million for employee share-based compensation payroll taxes and received$0.4 million in proceeds from the exercise of stock options, compared to payments of$6.2 million for employee share-based compensation payroll taxes and proceeds of$0.6 million from the exercise of stock options in the first three months of fiscal year 2022. We do not directly control the timing of the exercise of stock options. Such exercises are independent decisions made by grantees and are influenced most directly by the stock price and the expiration dates of stock option awards. Such proceeds are difficult to forecast, resulting from several factors that are outside our control. We believe that such proceeds will remain a nominal source of cash in the future.
Critical Accounting Estimates
Our critical accounting estimates are disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of our Annual Report on Form 10-K. There have been no significant changes to our policies during the three months endedMay 1, 2022 . For a discussion of recent accounting pronouncements, see Note 1 to our interim unaudited condensed consolidated financial statements.
Available Information
General information about us can be found on our website at www.semtech.com. The information on our website is for informational purposes only and should not be relied on for investment purposes. The information on our website is not incorporated by reference into this Quarterly Report and should not be considered part of this or any other report filed with theSEC . We make available free of charge, either by direct access on our website or by a link to theSEC website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or as soon as 35 --------------------------------------------------------------------------------
reasonably practicable after such reports are electronically filed with, or
furnished to, the
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