The following discussion and analysis of our financial condition and operating results should be read in conjunction with our Consolidated Financial Statements and related Notes included in Item 8 of this Annual Report on Form 10-
K. Seealso "Special Note Regarding Forward Looking and Cautionary Statements" at the beginning of this Annual Report on Form 10-K.
We are a leading global supplier of high-performance analog and mixed-signal semiconductors and advanced algorithms and were incorporated in
Delawarein 1960. We design, develop, manufacture and market a broad range of products that are sold principally into applications within the infrastructure, high-end consumer and industrial end markets. Infrastructure end market includes data centers, PON, base stations, optical networks, servers, carrier networks, switches and routers, cable modems, wireless LAN and other communication infrastructure equipment. High-end consumer end market includes 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. Industrial end market includes IoT applications, analog and digital video broadcast equipment, video-over-IP solutions, automated meter reading, smart grid, wireless charging, military and aerospace, medical, security systems, automotive, industrial and home automation and other industrial equipment. Our end customers are primarily OEMs that produce and sell electronics. We report results on the basis of 52 and 53 week periods and our fiscal year ends on the last Sunday in January. Fiscal years 2022, 2021 and 2020 consisted of 52 weeks, 53 weeks and 52 weeks, respectively. We have three operating segments-Signal Integrity, Wireless and Sensing and Protection-that historically have been aggregated into one reportable segment identified as the " Semiconductor Products Group." In the fourth quarter of fiscal year 2022, we updated our forecasts and assessed the economic performance of the three operating segments and concluded that Protection is no longer expected to be economically similar to the other operating segments. This is primarily because our projections indicate that the gross margin of products within Protection will not be economically similar to products within the other operating segments. Accordingly, we concluded that Protection should be separately reported as its own reportable segment. This decision resulted in the formation of two reportable segments, including the High-Performance Analog Group, which is comprised of the Signal Integrity and Wireless and Sensing operating segments, and the System Protection Group, which is comprised of the Protection operating segment. All prior year information in the tables below has been revised retrospectively to reflect the change to our reportable segments. See Note 15 to the Consolidated Financial Statements for segment information. Despite the challenges of the pandemic, we remained focused on furthering our role as a leading provider of disruptive platforms that enable our customers to deliver solutions to create a smarter planet. We continued to invest in secular trends that enable a smarter, more sustainable planet; enable higher bandwidth; and enable greater mobility. As a result, we expect these markets and our associated products' sales to grow rapidly over the next several years. The increasing adoption of our LoRa® technology for low power wide-area networks is providing connectivity solutions that enable IoT networks to make a smarter, more connected planet. Additionally, our portfolio of optical connectivity solutions continue to address the demand for greater bandwidth and higher performance, while using less power by our global hyper-scale data center customers. Additionally, the unexpected pivot to online learning and work from home during the pandemic exposed the fragile nature of many global networks that struggled under the spike in demand. This has driven infrastructure suppliers around the world to accelerate their investments in high speed connectivity using 5G wireless and PON technology where we are an industry leader. The trend towards adoption of finer silicon geometries has accelerated across all categories of end systems, making them increasingly vulnerable to electrical and electromagnetic threats. Our Protection Solutions, which enable the highest levels of system performance, have found increased adoption across the board, driven by the need to maintain product functionality despite the challenging threat environment (electrical and electromagnetic), and increased system sensitivity to threats due to adoption of finer silicon geometries for implementation of system functions. Finally, the increasing demand for smaller, lower-powered higher performance mobile platforms with more enjoyable organic light-emitting diode displays has benefited our protection and proximity sensing solutions that protect these mobile devices and their users from dangerous radio frequency signals. During the fiscal year ended January 30, 2022, we also maintained our strategy of smaller, targeted investments focused mainly on minority positions in support of the developing LoRa ecosystem and the many new IoT solutions we are introducing. In addition to these strategic investments, we took further actions to help ensure the supply of products from our vendors and suppliers. After the initial onset of the pandemic, the semiconductor industry experienced and is continuing to experience a significant increase in demand that led to tighter capacity. We believe our investments in fiscal year 2022 position us well to support our expectations of future growth.
Impact of COVID-19
The COVID-19 pandemic has significantly affected health and economic conditions throughout the
U.S.and the rest of the world including Asia, 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 29 --------------------------------------------------------------------------------
suffered during these closures has resulted in reduced production of our products, delays in delivering our products to our customers and reduced ability to receive supplies, which have had and may continue to have, individually and in the together, a negative effect on our bottom line.
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, 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 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. Sales made directly to customers during fiscal years 2022, 2021 and 2020 were approximately 13%, 18% and 28% of net sales, respectively. The remaining 87%, 82% and 72% of net sales, respectively, 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 including
Taiwanand China. Foreign sales for fiscal years 2022, 2021 and 2020 constituted approximately 90%, 90% and 91%, respectively, of our net sales. Approximately 79%, 80% and 77% of net sales in fiscal years 2022, 2021 and 2020, respectively, were to customers located in the Asia-Pacific region. The remaining foreign sales were primarily to customers in Europe, Canadaand Mexico. 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 to not result in sales, including a customer 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.
We derive our revenue primarily from the sale of semiconductor products into various end markets. Revenue is recognized when control of these products is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for these products. Control is generally transferred when products are shipped and, to a lesser extent, when the products are delivered. Recovery of costs associated with product design and engineering services are recognized during the period in which services are performed and are reported as a reduction to product development and engineering expense. Historically, these recoveries have not exceeded the cost of the related development efforts. We include revenue related to granted technology licenses as part of "Net sales" in the Statements of Income. Historically, revenue from these arrangements has not been significant though it is part of our recurring ordinary business.
We determine revenue recognition through the following five steps:
• Identification of the contract(s) with a customer
• Identification of performance obligations in the contract
• Determination of the transaction price
• Allocation of the transaction price to the performance obligations in the contract
• Revenue recognition when or as performance obligations are met
We recognize a contract when it has the approval and commitment of both parties, the rights of the parties are identified, the terms of payment are identified, the contract has commercial substance and collection of the consideration is probable.
Our revenue contracts generally represent a single performance obligation to sell our products to trade customers. Net sales reflect the transaction prices for contracts, which include units shipped at selling prices reduced by variable consideration. Determination of variable consideration requires judgment by us. Variable consideration includes expected sales returns and other price adjustments. Variable consideration is estimated using the expected value method considering all reasonably available information, including our historical experience and our current expectations, and is reflected in the transaction price when sales are recorded. Sales returns are generally accepted at our discretion or from distributors with such rights. Our contracts with trade customers do not have significant financing components or non-cash consideration. We record net sales excluding taxes collected on our sales to our trade customers. We provide an assurance type warranty, which is typically not sold separately and does not represent a separate performance obligation. Our payment terms are generally aligned with shipping terms.
Gross profit is equal to our net sales less our cost of sales. Our cost of sales includes materials, depreciation on fixed assets used in the manufacturing process, shipping costs, direct labor and overhead. The majority of the Company's manufacturing is outsourced, resulting in relatively low fixed manufacturing costs and variable costs that highly correlate with volume. We determine the cost of inventory by the first-in, first-out method.
Our operating costs and expenses generally include selling, general and administrative, product development and engineering costs, costs associated with acquisitions, restructuring costs and other operating costs.
A discussion of our results of operations for the fiscal years ended
January 30, 2022and January 31, 2021and year-over-year comparisons between these fiscal years appears below. In the fourth quarter of fiscal year 2022, we made certain changes in our reportable segments based on the economic performance of our operating segments (see Note 15 on segment information). With the exception of net sales and gross profit, which are discussed below to reflect the changes to our reportable segments, a discussion of our results of operations for the fiscal year ended January 26, 2020and year-over-year comparisons between fiscal years 2021 and 2020 have been omitted from this Annual Report on Form 10-K, but may be found in "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 ended January 31, 2021, filed with the SECon March 24, 2021and is incorporated herein by reference.
Fiscal 2022 vs. Fiscal 2021
The following table summarizes our net sales by primary end market:
Fiscal Years (in thousands, except percentages) 2022 2021 Net Sales % Net Sales Net Sales % Net Sales Change Infrastructure
$ 264,46435 % $ 245,54942 % 8 % High-End Consumer 220,380 30 % 162,342 27 % 36 % Industrial 256,014 35 % 187,226 31 % 37 % Total $ 740,858100 % $ 595,117100 % 24 % Net sales for fiscal year 2022 were $740.9 million, an increase of 24% compared to $595.1 millionfor fiscal year 2021, which had benefited from an additional week. We experienced strong demand across all three of our end markets compared to the prior year when our net sales were adversely impacted by delays in certain shipments of our products due to COVID-19 related shutdowns, including certain subcontractors in Malaysia. Net sales from our industrial end market increased $68.8 millionversus the prior year primarily due to an approximately $46 millionincrease in LoRa-enabled product sales led by an increase in pico gateways and an approximately $19 millionincrease in industrial automation and automotive sales. Net sales from our high-end consumer end market increased $58.0 millionprimarily driven by an approximately $23 millionincrease in Protection product sales, including wearables, mobile computers and smartphones, and an approximately $22 millionincrease in our proximity sensing product sales, including smartphones. Net sales from our infrastructure end market increased $18.9 milliondriven by an approximately $30 millionincrease in 10G PON sales, partially offset by an approximately $17 milliondecline in data center demand. 31 -------------------------------------------------------------------------------- Entering fiscal year 2023, customer demand remains strong and supply tight, with many of our suppliers running at or near capacity and our customers competing for the limited supply. While we believe we have good visibility going into the first quarter of fiscal year 2023, it is unknown how much of this demand strength reflects real end market consumption or just our customers' efforts to increase their inventory levels over fear of the global supply chain constraints. To the extent that the increase in demand is driven by the latter, we, and the industry as a whole, could experience a period of slower future demand as the potential excess inventories are worked down. Based on booking trends and backlog entering the quarter, we estimate net sales for the first quarter of fiscal year 2023 to be between $195.0 millionand $205.0 million.
The following table summarizes our net sales by reportable segment:
Fiscal Years (in thousands, except percentages) 2022 2021 Net Sales % Net Sales Net Sales % Net Sales Change High-Performance Analog Group
$ 537,28873 % $ 433,17473 % 24 % System Protection Group 203,570 27 % 161,943 27 % 26 % Total $ 740,858100 % $ 595,117100 % 24 % Net sales from our High-Performance Analog Groupincreased $104.1 millionin fiscal year 2022 versus fiscal year 2021 primarily due to an approximately $46 millionincrease in LoRa-enabled product sales led by an increase in pico gateways, an approximately $30 millionincrease in 10G PON sales, an approximately $22 millionincrease in our proximity sensing product sales, including smartphones, and an approximately $15 millionincrease in broadcast product sales, partially offset by an approximately $17 milliondecline in data center demand. Net sales from our System Protection Groupincreased $41.6 millionin fiscal year 2022 versus fiscal year 2021 primarily driven by an approximately $23 millionincrease in consumer product sales, including wearables, mobile computers and smartphones, and an approximately $19 millionincrease in industrial automation and automotive sales.
Fiscal 2021 vs. Fiscal 2020
Fiscal Years (in thousands, except percentages) 2021 2020 Net Sales % Net Sales Net Sales % Net Sales Change Infrastructure
$ 245,54942 % $ 209,93638 % 17 % High-End Consumer 162,342 27 % 158,394 29 % 2 % Industrial 187,226 31 % 179,182 33 % 4 % Total $ 595,117100 % $ 547,512100 % 9 % Net sales for fiscal year 2021 were $595.1 million, an increase of 9% compared to $547.5 millionfor fiscal year 2020. During fiscal year 2021, the infrastructure end market increased by $35.6 milliondriven by an approximately $20 millionincrease in PON sales and an approximately $17 millionincrease in data center demand. The industrial end market increased by $8.0 milliondue to an approximately $14 millionincrease in LoRa-enabled product sales, partially offset by an approximately $6 milliondecrease in broadcast product sales due to the adverse impact of COVID-19 on large venue events. The high-end consumer end market increased by $3.9 milliondriven by strength in proximity sensing product sales. Net sales also benefited from an extra week in fiscal year 2021.
The following table summarizes our net sales by reportable segment:
Fiscal Years (in thousands, except percentages) 2021 2020 Net Sales % Net Sales Net Sales % Net Sales Change High-Performance Analog Group
$ 433,17473 % $ 390,30071 % 11 % System Protection Group 161,943 27 % 157,212 29 % 3 % Total $ 595,117100 % $ 547,512100 % 9 % Net sales from our High-Performance Analog Groupincreased $42.9 millionin fiscal year 2021 versus fiscal year 2020 primarily driven by an approximately $20 millionincrease in PON sales, an approximately $17 millionincrease in data center demand and an approximately $14 millionincrease in LoRa-enabled product sales, partially offset by an approximately $6 milliondecrease in broadcast product sales due to the adverse impact of COVID-19 on large venue events. Net sales from our System Protection Groupincreased $4.7 millionin fiscal year 2021 versus fiscal year 2020 primarily driven by an approximately $7 millionincrease in industrial automation and automotive sales, partially offset by weaker demand for consumer products, including smartphones. 32 --------------------------------------------------------------------------------
Fiscal 2022 vs. Fiscal 2021
The following table summarizes our gross profit and gross margin by reportable segment: Fiscal Years (in thousands, except percentages) 2022 2021 Gross Profit
Gross margin Gross profit
$ 364,59467.9 % $ 283,66865.5 % System Protection Group 105,605 51.9 % 81,631 50.4 %
Unallocated costs, including stock-based compensation (4,118)
$ 466,08162.9 % $ 363,54961.1 % In fiscal year 2022, gross profit increased to $466.1 millionfrom $363.5 millionin fiscal year 2021 as a result of higher sales. This increase included an $80.9 millionincrease from our High-Performance Analog Groupand a $24.0 millionincrease from our System Protection Group, both of which experienced higher demand and implemented price increases to offset higher manufacturing costs during fiscal year 2022. Our gross margin was 62.9% in fiscal year 2022, compared to 61.1% in fiscal year 2021. Gross margin in our High-Performance Analog Groupwas 67.9% in fiscal year 2022, compared to 65.5% in fiscal year 2021 and gross margin in our System Protection Groupwas 51.9% in fiscal year 2022, compared to 50.4% in fiscal year 2021, reflecting a more favorable product mix in both of our reportable segments. The majority of the Company's manufacturing is outsourced, resulting in relatively low fixed manufacturing costs and variable costs that highly correlate with volume. Despite the capacity constraints within the industry, we expect overall gross profit for 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.
Fiscal 2021 vs. Fiscal 2020
The following table summarizes our gross profit and gross margin by reportable segment: Fiscal Years (in thousands, except percentages) 2021 2020 Gross Profit
Gross margin Gross profit
$ 283,66865.5 % $ 259,17266.4 % System Protection Group 81,631 50.4 % 78,809 50.1 %
Unallocated costs, including stock-based compensation (1,750)
$ 363,54961.1 % $ 336,68461.5 % In fiscal year 2021, gross profit increased to $363.5 millionfrom $336.7 millionin fiscal year 2020. This increase included a $24.5 millionincrease from our High-Performance Analog Groupand a $2.8 millionincrease from our System Protection Groupas a result of higher sales. Our gross margin was 61.1% in fiscal year 2021, compared to 61.5% in fiscal year 2020. Gross margin in our High-Performance Analog Groupwas 65.5% in fiscal year 2021, compared to 66.4% in fiscal year 2020, reflecting a less favorable product mix and higher charges for inventory reserves. Gross margin in our System Protection Groupwas 50.4% in fiscal year 2021, compared to 50.1% in fiscal year 2020, reflecting a more favorable product mix.
Operating costs and expenses
Fiscal Years (in thousands, except percentages) 2022 2021 Cost/Exp. % Net Sales Cost/Exp. % Net Sales Change Selling, general and administrative
$ 168,21023 % $ 162,83227 % 3 % Product development and engineering 147,925 20 % 117,529 20 % 26 % Intangible amortization 4,942 1 % 8,265 1 % (40) % Changes in the fair value of contingent earn-out obligations (13) - % (33) - % (61) % Total operating costs and expenses $ 321,06444 % $ 288,59348 % 11 %
Selling, general and administrative expenses
SG&A expenses for fiscal year 2022 increased by
$5.4 millionprimarily driven by an increase of approximately $3 millionin staffing-related costs, including performance-based compensation. 33 --------------------------------------------------------------------------------
Product development and engineering expenses
Product development and engineering expenses for fiscal years 2022 and 2021 were
$147.9 millionand $117.5 million, respectively, or an increase of 26%. This increase reflects an approximately $12 millionincrease in staffing-related costs, including performance-based compensation, and an approximately $13 millionincrease 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 was
$4.9 millionand $8.3 millionin fiscal years 2022 and 2021, respectively. This decrease was primarily due to certain finite-lived intangible assets associated with the acquisitions of Gennum Corporation, Triune Systems, LLC, and AptoVision Technologies, Inc., which became fully amortized during fiscal year 2021 and certain finite-lived intangible assets associated with the acquisition of Trackio International AG, which became fully amortized during fiscal year 2022.
Changes in the Fair Value of Contingent Earnings Obligations
The change in the fair value of conditional price supplements in fiscal year 2022 compared to fiscal year 2021 reflects the difference between the final price supplement targets achieved for Cycleo SAS and the last price supplement payments made.
Interest expense was
$5.1 millionand $5.3 millionfor fiscal years 2022 and 2021, respectively. The $0.2 milliondecrease was primarily related to lower overall debt levels.
Impairment of investments and provisions for credit losses
In fiscal year 2022, investment impairments and credit loss reserves totaled a loss of
$1.3 millionas we increased our credit loss reserves by $1.1 millionfor our available-for-sale ("AFS") debt securities consisting of our convertible debt investments in privately-held companies and recorded a $0.2 millionimpairment on one of our non-marketable equity investments. In fiscal year 2021, investment impairments and credit loss reserves totaled a loss of $6.8 millionas we increased our credit loss reserves by $2.9 millionfor our AFS debt securities, in part, due to the adverse impact of COVID-19 on these early-stage companies, and recorded impairments on five of our non-marketable equity investments totaling $3.9 million.
Provision for income taxes
We recorded income tax expense of
$15.5 millionfor fiscal year 2022 compared to income tax expense of $3.4 millionfor fiscal year 2021. The effective tax rates for fiscal years 2022 and 2021 were provision rates of 11.0% and 5.4%, respectively. Our effective tax rate for fiscal year 2022 differs from the statutory federal income tax rate of 21% primarily due to our regional mix of income, the impact of tax credits generated, and the recognition of excess tax benefits related to share-based compensation. We receive a tax benefit from a tax holiday that was granted in Switzerland. The tax holiday commenced on January 30, 2017, and was effective for five years (the "Initial Term"). Since we met certain staffing targets, the holiday has been extended for an additional five years. The maximum benefit under this tax holiday is CHF 500.0 millionof cumulative after tax profit, which equates to a maximum potential tax savings of CHF 44.0 million. Once the extended term of the tax holiday expires or we achieve the maximum benefit, our effective tax rate could be negatively impacted if we are unable to negotiate an extension or expansion of the tax holiday. The Swiss Tax Reform that was enacted during fiscal year 2020 reduces the Swiss Cantonal tax rate, which further increases the benefit of our Tax Holiday. 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.
For more information on the effective tax rate and the impact of tax law, see note 11 to the consolidated financial statements.
Cash 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 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 effects on our customers, the availability of sufficient amounts of financing and our operating performance. 34 -------------------------------------------------------------------------------- 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 described below. As of
January 30, 2022, we had $279.6 millionin cash and cash equivalents and $427.0 millionof undrawn capacity on our Credit Facility (as defined below). 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 in November 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 of January 30, 2022, our foreign subsidiaries held approximately $221.9 millionof cash and cash equivalents, compared to $182.9 millionat January 31, 2021. In connection with the enactment of the Tax Cuts and Jobs Act ("Tax Act"), all historic and current foreign earnings are taxed in the U.S.Depending on the jurisdiction, these foreign earnings are potentially subject to a withholding tax, if repatriated. As of January 30, 2022, our historical undistributed earnings of the Company's foreign subsidiaries are intended to be permanently reinvested outside of the U.S.With the enactment of the Tax Act, all post-1986 previously unremitted earnings for which no U.S.deferred tax liability had been accrued were subject to U.S.tax. Notwithstanding the U.S.taxation of these amounts, we have determined that $50.0 millionof our current foreign earnings will not be permanently reinvested. As a result, we have established a deferred income tax liability for the Swiss withholding tax that will be due upon distribution of these earnings. If we needed to remit all or a portion of our historical undistributed earnings to the U.S.for investment in our domestic operations, any such remittance could result in increased tax liabilities and a higher effective tax rate. Determination of the amount of the unrecognized deferred tax liability on these unremitted earnings is not practicable. 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. Sources of Liquidity Operating Cash Flows Operating cash flows were $203.1 millionor 27.4% of net sales in fiscal year 2022 and $118.9 millionor 20.0% of net sales in fiscal year 2021. Our consistently solid profitability and operating cash flow are driven by our ability to value price for the differentiated technology that we provide, as well as our fabless business model, which is highly flexible to changes in customer demand.
November 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 and HSBC Bank USA, National Association, as administrative agent, swing line lender and letter of credit issuer in order to provide a more flexible borrowing structure by expanding the borrowing capacity of the revolving loans under the secured first lien credit facility ("the Credit Facility") to $600.0 million, eliminating the term loans and extending the maturity to November 7, 2024. In fiscal year 2022, we received $20.0 millionin proceeds from our Credit Facility and made payments on our Credit Facility that totaled $28.0 million. In fiscal year 2021, we made payments on our Credit Facility that totaled $16.0 million. As of January 30, 2022, we had $173.0 millionof outstanding borrowings against our Credit Facility, which had $427.0 millionof undrawn borrowing 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 in U.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 in U.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 the Federal Reserve Bank of New Yorkand (c) one-month LIBOR (determined with respect to deposits in U.S.Dollars), plus 1.00%. Interest on loans made under the Credit Facility in Alternative Currencies 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 35 -------------------------------------------------------------------------------- by us plus the Applicable Margin. See "Interest Rate and Credit Risk" under Item 7A of this Annual Report on 10-K for a discussion of the potential impact of the discontinuation of LIBOR to our outstanding debt and financial results. During fiscal year 2021, we entered into an interest rate swap agreement to hedge the variability of interest payments on the first $150.0 millionof debt outstanding under our Credit Facility. The swap has a three-year term and based on our current leverage ratio as of January 30, 2022, interest payments on the first $150.0 millionof 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.
No amortization is required with respect to Revolving Loans and we may voluntarily prepay Loans at any time and from time to time without premium or penalty, other than “Break Charges” and customary charges 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 of
January 30, 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. On August 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.
Intended uses of liquidity
Capital expenditure 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 share buyback program
We currently have in effect a stock repurchase program that was initially approved by our Board of Directors in
March 2008. On March 11, 2021, our Board of Directors approved the expansion of the stock repurchase program by an additional $350.0 million. This program represents one of our principal efforts to return value to our stockholders. During fiscal years 2022 and 2021, we repurchased shares of common stock under this program for $129.7 millionand $71.4 million, respectively. As of January 30, 2022, we had repurchased $539.0 millionin shares of our common stock under the program since inception and the remaining authorization under the program was $259.4 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.
We have operating leases for real estate, vehicles, and office equipment with remaining lease terms of up to eight years, some of which include options to extend the leases for up to three years, and some of which include options to terminate the leases within one year. Our operating lease liabilities totaled
$20.6 millionand $17.1 millionas of January 30, 2022and January 31, 2021, respectively. 36 --------------------------------------------------------------------------------
Capital purchase commitments and other open purchase commitments are for the purchase of plant, equipment, raw materials, supplies and services. They are not recorded liabilities in our Consolidated Balance Sheets as of
January 30, 2022, as we have not yet received the related goods or taken title to the goods or received services. As of January 30, 2022, we had $3.7 millionin open capital purchase commitments and $97.9 millionin other open purchase commitments.
Compensation and defined benefit plans
We maintain a deferred compensation plan for certain officers and key executives that allow participants to defer a portion of their compensation for future distribution at various times permitted by the plan. Our liability for deferred compensation under this plan was
$45.2 millionand $41.0 millionas of January 30, 2022and January 31, 2021, respectively, and is included in accrued liabilities and other long-term liabilities in the Consolidated Balance Sheets. The plan provides for a discretionary Company match up to a defined portion of the employee's deferral, with any match subject to defined conditions. We have purchased whole life insurance on the lives of certain of our current and former deferred compensation plan participants. This corporate-owned life insurance is held in a grantor trust and is intended to cover a majority of the costs of our deferred compensation plan. The cash surrender value of our corporate-owned life insurance was $35.2 millionand $27.6 millionas of January 30, 2022and January 31, 2021, respectively, and is included in other assets in the Consolidated Balance Sheets. The increase in the cash surrender value of the corporate-owned life insurance as of January 30, 2022compared to January 31, 2021was related to an overall increase in market value and $6.0 millionof premiums paid in order to provide substantive coverage for the Company's deferred compensation liability.
We maintain defined benefit pension plans for the employees of our Swiss subsidiaries and our French subsidiary. Expected future payments under these plans total
The liability associated with vested, but unsettled restricted stock awards that are to be settled in cash totaled
$11.5 millionand $14.0 millionas of January 30, 2022and January 31, 2021, respectively, and was included in "Other long-term liabilities" in the Balance Sheets.
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
$94.3 millionand $96.3 millionas of January 30, 2022and January 31, 2021, respectively. Our working capital, including cash and cash equivalents and the current portion of long-term debt, was $373.9 millionand $365.2 millionas of January 30, 2022and January 31, 2021, respectively.
One of our primary goals is to improve the cash flows from our existing business activities. Additionally, we will continue to seek to maintain or improve our existing business performance and deploy our accumulated cash balances in the most effective manner through alternatives such as 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.
In summary, our cash flows for each period were as follows:
(in thousands) 2022
Net cash provided by operating activities
Net cash used in investing activities (40,316)
Net cash used in financing activities (152,097)
Net increase (decrease) in cash and cash equivalents
Net cash from operating activities is determined by net income, adjusted for non-cash items and fluctuations in operating assets and liabilities.
Operating cash flow for fiscal year 2022 compared to fiscal year 2021 was favorably impacted by a 24.5% increase in revenue and unfavorably by a
increased product development and engineering expenses due to higher personnel costs, increased operating supplies and
research and development activity schedule fluctuations, and a
Net cash used in investing activities is primarily attributable to capital expenditures, purchases of investments and premiums paid for corporate-owned life insurance, net of proceeds from sales of property, plant and equipment and proceeds from sales of investments. Investing activities are also impacted by acquisitions, net of any cash received, if applicable. Capital expenditures were
$26.2 millionand $32.7 millionin fiscal years 2022 and 2021, respectively, as we made significant investments to update and expand our production capabilities.
In fiscal 2022 and 2021, we paid
In fiscal year 2022, we paid
$6.0 millionfor premiums on corporate-owned life insurance 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 our common stock, payments related to employee share-based compensation payroll taxes and payments on our Credit Facility, offset by proceeds from our Credit Facility and proceeds from stock option exercises. In fiscal year 2022, we paid $19.4 millionfor employee share-based compensation payroll taxes and received $5.3 millionin proceeds from the exercise of stock options, compared to payments of $21.5 millionfor employee share-based compensation payroll taxes and proceeds of $8.5 millionfrom the exercise of stock options in fiscal year 2021. 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 which are outside our control. We believe that such proceeds will remain a nominal source of cash in the future.
Critical accounting estimates
We prepare our consolidated financial statements in accordance with GAAP. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities. Accordingly, actual results could differ materially from our estimates. We consider an accounting policy to be a "critical accounting policy and estimate" if: (1) we must make assumptions that were uncertain when the judgment was made, and (2) changes in the estimate assumptions or selection of a different estimate methodology could have a significant impact on our financial position and the results that we report in our consolidated financial statements. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made. We believe the following represent our most significant accounting estimates: •Inventories - We value our inventory at the lower of cost or net realizable value, which requires us to make estimates regarding potential obsolescence or lack of marketability. We reduce the basis of our inventory due to changes in demand or change in product life cycles. The estimation of customer demand requires management to evaluate and make assumptions of the impact of changes in demand or changes in product life cycles on current sales levels. Our write-down to net realizable value at the end of fiscal year 2022 and 2021 represented 27.5% and 26.3% of gross inventory, respectively. Based on fiscal year 2022 ending inventory, an increase in the write-down by one percent of gross inventory would decrease net inventory and increase cost of goods sold by
$1.6 million. •Revenue recognition - Net sales reflect the transaction prices for contracts, which include units shipped at selling prices reduced by variable consideration. Determination of variable consideration requires judgment by us and includes expected sales returns and other price adjustments. Variable consideration is estimated using the expected value method considering all reasonably available information, including our historical experience and our current expectations, and is reflected in the transaction price when sales are recorded. In fiscal year 2022, net sales were reduced by $21.0 millionin estimated variable consideration, or 2.8% of gross revenue. In fiscal year 2021, net sales were reduced by $18.1 millionin estimated variable consideration, or 3.0% of gross revenue. If variable consideration were estimated to be one percent higher, fiscal year 2022 revenue would have decreased by $7.6 million. •Income taxes - The identification and measurement of deferred tax assets and liabilities and the provisional estimates associated with applicable tax laws require a high degree of judgment and interpretation of tax laws in the U.S.and several other foreign jurisdictions. We use judgment in estimating whether or not our deferred tax assets will ultimately be realized, expected outcomes of audits and likelihood of our tax positions being sustained, forecasted earnings and available tax planning strategies. 38 -------------------------------------------------------------------------------- •Goodwill - We perform a goodwill impairment assessment on an annual basis, during the fourth quarter of each fiscal year, or more frequently if indicators of impairment exist. The analysis may include both qualitative factors, such as the industry and macro-economic environment, and quantitative assessments, both of which typically require a significant amount of judgment. Other significant estimates include market segment growth rates, assumed market share, estimated costs and discount rates based on the reporting unit's weighted average cost of capital. No impairment of goodwill has been recorded over the past three fiscal years. New Accounting Standards
The new accounting standards are described in Note 2 to the consolidated financial statements.
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