ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 to U.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 ended October 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 in China) 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 in China could negatively impact the overall demand for our products, cash flows from operations, need for capital expenditures and our liquidity position in future periods.
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 $9.26 for fiscal 2022, compared to net income per diluted share of $6.32 for fiscal 2021.
•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 from China-based OEMs and the build of inventory in anticipation of certain customers' product ramps.
•Capital expenditures were $213.5 million in fiscal 2022, compared to $187.0 million in fiscal 2021. Our capital expenditures in fiscal 2022 included investments in premium filter capacity.
•We completed the acquisitions of NextInput and United SiC for a total of $389.1 million, net of cash acquired.
•We recorded a $48.0 million goodwill impairment charge associated with the NextInput acquisition.
•We issued $500.0 million aggregate principal amount of 1.750% senior notes due 2024 (the "2024 Notes").
•We repaid $197.5 million on the 2020 Term Loan (as defined below), plus accrued and unpaid interest.
•We repurchased approximately 7.3 million shares of our common stock for approximately $1,152.3 million.
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 ended April 3, 2021, filed with the SEC on May 24, 2021, which is incorporated by reference herein, for a summary of our results of operations for the fiscal year ended March 28, 2020 along with a year-over-year comparison between fiscal years 2021 and 2020.
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| 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 in China, 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 $2,717.3 million in fiscal 2022 (approximately 58% of revenue) compared to $2,384.2 million in fiscal 2021 (approximately 59% of revenue). Shipments to Asia totaled $2,465.7 million in fiscal 2022 (approximately 53% of revenue) compared to $2,191.2 million in fiscal 2021 (approximately 55% of revenue).
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.
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 $48.0 million. See Note 6 of the Notes to Consolidated Financial Statements for additional information.
Operating Segments
Mobile Products
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| | 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 of NextInput. These increases were partially offset by lower incentive-based compensation.
Infrastructure and Defense Products
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| | 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.
INTEREST, OTHER INCOME (EXPENSE) AND INCOME TAXES
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| | 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 on October 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.
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 April 2, 2022, total remaining unearned compensation cost related to unvested restricted stock units was $121.0 million, which will be amortized over the weighted-average remaining service period of approximately 1.2 years.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operations is our primary source of liquidity. As of April 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 of April 3, 2021.
Our $972.6 million of total cash and cash equivalents as of April 2, 2022, includes $831.8 million held by our foreign subsidiaries, of which $709.5 million is held by Qorvo International Pte. Ltd. in Singapore. If the undistributed earnings of our foreign subsidiaries are needed in the U.S., we may be required to pay state income and/or foreign local withholding taxes to repatriate these earnings.
Credit Agreement
On September 29, 2020, we and certain of our U.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”) with Bank 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 of December 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 $500.0 million and subject to, among other things, securing additional funding commitments from the existing or new lenders.
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 of April 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.
Stock Repurchases
On October 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.
On May 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 on October 31, 2019, which was terminated concurrent with the new authorization. As of April 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 from China-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 of NextInput 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.
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations and commitments (in thousands) as of April 2, 2022, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
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| 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.
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.
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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 | |
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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 $286.8 million and $532.4 million as of April 2, 2022 and April 3, 2021, respectively.
(2) Includes net amounts due to Non-Guarantor subsidiaries of $433.5 million and $395.3 million as of April 2, 2022 and April 3, 2021, respectively.
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Summarized Statement of Income (in thousands) | | Fiscal Year 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
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.
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.
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 April 2, 2022, we had $424.7 million in remaining unsatisfied performance obligations with an original
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 in U.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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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
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Qorvo, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 972,592 | | | $ | 1,397,880 | |
Accounts receivable, net of allowance of $402 and $331 as of April 2, 2022 and April 3, 2021, respectively | 568,850 | | | 457,431 | |
Inventories | 755,748 | | | 507,787 | |
Prepaid expenses | 49,839 | | | 41,572 | |
Other receivables | 32,151 | | | 27,324 | |
Other current assets | 70,685 | | | 51,810 | |
Total current assets | 2,449,865 | | | 2,483,804 | |
Property and equipment, net | 1,253,591 | | | 1,266,031 | |
Goodwill | 2,775,634 | | | 2,642,708 | |
Intangible assets, net | 674,786 | | | 611,155 | |
Long-term investments | 31,086 | | | 35,370 | |
Other non-current assets | 324,110 | | | 182,402 | |
Total assets | $ | 7,509,072 | | | $ | 7,221,470 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 327,915 | | | $ | 313,868 | |
Accrued liabilities | 240,186 | | | 255,060 | |
Other current liabilities | 107,026 | | | 112,653 | |
Total current liabilities | 675,127 | | | 681,581 | |
Long-term debt | 2,047,098 | | | 1,742,550 | |
Other long-term liabilities | 233,629 | | | 167,914 | |
Total liabilities | 2,955,854 | | | 2,592,045 | |
Commitments and contingent liabilities (Note 11) | | | |
Stockholders’ equity: | | | |
Preferred stock, $.0001 par value; 5,000 shares authorized; no shares issued and outstanding | — | | | — | |
Common stock and additional paid-in capital, $.0001 par value; 405,000 shares authorized; 106,303 and 112,557 shares issued and outstanding at April 2, 2022 and April 3, 2021, respectively | 4,035,849 | | | 4,244,740 | |
Accumulated other comprehensive income | 5,232 | | | 29,649 | |
Retained earnings | 512,137 | | | 355,036 | |
Total stockholders’ equity | 4,553,218 | | | 4,629,425 | |
Total liabilities and stockholders’ equity | $ | 7,509,072 | | | $ | 7,221,470 | |
See accompanying notes.
Qorvo, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
| | | | | |
Revenue | $ | 4,645,714 | | | $ | 4,015,307 | | | $ | 3,239,141 | |
Cost of goods sold | 2,359,546 | | | 2,131,741 | | | 1,917,378 | |
Gross profit | 2,286,168 | | | 1,883,566 | | | 1,321,763 | |
| | | | | |
Operating expenses: | | | | | |
Research and development | 623,636 | | | 570,395 | | | 484,414 | |
Selling, general and administrative | 349,718 | | | 367,238 | | | 343,569 | |
Other operating expense | 86,745 | | | 39,306 | | | 70,564 | |
Total operating expenses | 1,060,099 | | | 976,939 | | | 898,547 | |
Operating income | 1,226,069 | | | 906,627 | | | 423,216 | |
| | | | | |
Interest expense | (63,326) | | | (75,198) | | | (60,392) | |
Other income (expense), net | 18,341 | | | (24,049) | | | 32,265 | |
Income before income taxes | 1,181,084 | | | 807,380 | | | 395,089 | |
| | | | | |
Income tax expense | (147,731) | | | (73,769) | | | (60,764) | |
Net income | $ | 1,033,353 | | | $ | 733,611 | | | $ | 334,325 | |
| | | | | |
Net income per share: | | | | | |
Basic | $ | 9.38 | | | $ | 6.43 | | | $ | 2.86 | |
Diluted | $ | 9.26 | | | $ | 6.32 | | | $ | 2.80 | |
| | | | | |
Weighted average shares of common stock outstanding: | | | | | |
Basic | 110,196 | | | 114,034 | | | 117,007 | |
Diluted | 111,546 | | | 116,016 | | | 119,293 | |
See accompanying notes.
Qorvo, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands)
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
Net income | $ | 1,033,353 | | | $ | 733,611 | | | $ | 334,325 | |
Other comprehensive (loss) income, net of tax: | | | | | |
Change in pension liability | 857 | | | (597) | | | 501 | |
Foreign currency translation adjustment, including intra-entity foreign currency transactions that are of a long-term investment nature | (25,033) | | | 27,859 | | | 7,923 | |
Reclassification adjustments, net of tax: | | | | | |
Foreign currency (gain) loss realized upon liquidation of subsidiary | (359) | | | 16 | | | 353 | |
Amortization of pension actuarial loss | 118 | | | 83 | | | 135 | |
Other comprehensive (loss) income | (24,417) | | | 27,361 | | | 8,912 | |
Total comprehensive income | $ | 1,008,936 | | | $ | 760,972 | | | $ | 343,237 | |
See accompanying notes.
Qorvo, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | |
| Common Stock | | | | |
| Shares | | Amount | | | | Total |
Balance, March 30, 2019 | 119,063 | | | $ | 4,687,455 | | | $ | (6,624) | | | $ | (321,152) | | | $ | 4,359,679 | |
Net income | — | | | — | | | — | | | 334,325 | | | 334,325 | |
Other comprehensive income | — | | | — | | | 8,912 | | | — | | | 8,912 | |
Exercise of stock options and vesting of restricted stock units, net of shares withheld for employee taxes | 1,551 | | | (974) | | | — | | | — | | | (974) | |
Issuance of common stock in connection with employee stock purchase plan | 452 | | | 28,657 | | | — | | | — | | | 28,657 | |
Cumulative-effect adoption of ASU 2016-02 | — | | | — | | | — | | | 69 | | | 69 | |
Repurchase of common stock, including transaction costs | (6,441) | | | (501,868) | | | — | | | (13,263) | | | (515,131) | |
Stock-based compensation | — | | | 77,107 | | | — | | | — | | | 77,107 | |
Other | — | | | — | | | — | | | 21 | | | 21 | |
Balance, March 28, 2020 | 114,625 | | | $ | 4,290,377 | | | $ | 2,288 | | | $ | — | | | $ | 4,292,665 | |
Net income | — | | | — | | | — | | | 733,611 | | | 733,611 | |
Other comprehensive income | — | | | — | | | 27,361 | | | — | | | 27,361 | |
Exercise of stock options and vesting of restricted stock units, net of shares withheld for employee taxes | 1,157 | | | (29,163) | | | — | | | — | | | (29,163) | |
Issuance of common stock in connection with employee stock purchase plan | 417 | | | 31,366 | | | — | | | — | | | 31,366 | |
Cumulative-effect adoption of ASU 2016-13 | — | | | — | | | — | | | (38) | | | (38) | |
Repurchase of common stock, including transaction costs | (3,642) | | | (136,568) | | | — | | | (378,516) | | | (515,084) | |
Stock-based compensation | — | | | 88,728 | | | — | | | — | | | 88,728 | |
Other | — | | | — | | | — | | | (21) | | | (21) | |
Balance, April 3, 2021 | 112,557 | | | $ | 4,244,740 | | | $ | 29,649 | | | $ | 355,036 | | | $ | 4,629,425 | |
Net income | — | | | — | | | — | | | 1,033,353 | | | 1,033,353 | |
Other comprehensive loss | — | | | — | | | (24,417) | | | — | | | (24,417) | |
Exercise of stock options and vesting of restricted stock units, net of shares withheld for employee taxes | 779 | | | (49,798) | | | — | | | — | | | (49,798) | |
Issuance of common stock in connection with employee stock purchase plan | 273 | | | 33,288 | | | — | | | — | | | 33,288 | |
Repurchase of common stock, including transaction costs | (7,306) | | | (276,035) | | | — | | | (876,252) | | | (1,152,287) | |
Stock-based compensation | — | | | 83,654 | | | — | | | — | | | 83,654 | |
Balance, April 2, 2022 | 106,303 | | | $ | 4,035,849 | | | $ | 5,232 | | | $ | 512,137 | | | $ | 4,553,218 | |
See accompanying notes.
Qorvo, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | |
Net income | $ | 1,033,353 | | | $ | 733,611 | | | $ | 334,325 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation | 210,949 | | | 203,206 | | | 221,632 | |
Intangible assets amortization | 150,466 | | | 252,898 | | | 247,299 | |
Loss on debt extinguishment | 744 | | | 61,991 | | | — | |
Deferred income taxes | 31,875 | | | (18,136) | | | (11,099) | |
Gain on Cavendish investment | — | | | — | | | (43,008) | |
Impairment of equity investment | — | | | 2,775 | | | 18,339 | |
Goodwill impairment | 48,000 | | | — | | | — | |
Stock-based compensation expense | 83,507 | | | 89,322 | | | 75,978 | |
Other, net | 14,150 | | | (2,151) | | | 23,531 | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable, net | (107,896) | | | (91,275) | | | 21,029 | |
Inventories | (236,196) | | | 9,390 | | | 10,252 | |
Prepaid expenses and other assets | (176,742) | | | (18,490) | | | (14,513) | |
Accounts payable | 33,950 | | | 34,201 | | | 15,425 | |
Accrued liabilities | (11,815) | | | 30,671 | | | 48,670 | |
Income taxes payable and receivable | (3,139) | | | 34,618 | | | 12,935 | |
Other liabilities | (21,963) | | | (20,778) | | | (15,149) | |
Net cash provided by operating activities | 1,049,243 | | | 1,301,853 | | | 945,646 | |
Cash flows from investing activities: | | | | | |
Purchases of property and equipment | (213,466) | | | (186,960) | | | (164,104) | |
Purchases of businesses, net of cash acquired | (389,136) | | | (47,069) | | | (946,043) | |
Other investing activities | 6,646 | | | 15,371 | | | 4,405 | |
Net cash used in investing activities | (595,956) | | | (218,658) | | | (1,105,742) | |
Cash flows from financing activities: | | | | | |
Repurchase and payment of debt | (197,500) | | | (1,087,994) | | | — | |
Proceeds from borrowings and debt issuances | 499,070 | | | 1,206,750 | | | 659,000 | |
Repurchase of common stock, including transaction costs | (1,152,287) | | | (515,084) | | | (515,131) | |
Proceeds from the issuance of common stock | 38,303 | | | 42,598 | | | 50,198 | |
Tax withholding paid on behalf of employees for restricted stock units | (53,382) | | | (38,658) | | | (21,791) | |
Other financing activities | (9,714) | | | (9,535) | | | (6,717) | |
Net cash (used in) provided by financing activities | (875,510) | | | (401,923) | | | 165,559 | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (3,281) | | | 1,425 | | | (1,233) | |
Net (decrease) increase in cash, cash equivalents and restricted cash | (425,504) | | | 682,697 | | | 4,230 | |
Cash, cash equivalents and restricted cash at the beginning of the period | 1,398,309 | | | 715,612 | | | 711,382 | |
Cash, cash equivalents and restricted cash at the end of the period | $ | 972,805 | | | $ | 1,398,309 | | | $ | 715,612 | |
| | | | | |
Reconciliation of cash, cash equivalents and restricted cash: | | | | | |
Cash and cash equivalents | $ | 972,592 | | | $ | 1,397,880 | | | $ | 714,939 | |
Restricted cash included in "Other current assets" and "Other non-current assets" | 213 | | | 429 | | | 673 | |
Total cash, cash equivalents and restricted cash | $ | 972,805 | | | $ | 1,398,309 | | | $ | 715,612 | |
| | | | | |
Supplemental disclosure of cash flow information: | | | | | |
Cash paid during the year for interest, net of amounts capitalized | $ | 59,393 | | | $ | 81,232 | | | $ | 48,871 | |
Cash paid during the year for income taxes, net of refunds | $ | 125,322 | | | $ | 53,236 | | | $ | 55,513 | |
Capital expenditures included in liabilities | $ | 36,069 | | | $ | 56,469 | | | $ | 22,904 | |
See accompanying notes.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2022
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Qorvo, Inc. was formed as the result of a business combination (the "Business Combination") of RF Micro Devices, Inc. ("RFMD") and TriQuint Semiconductor, Inc. ("TriQuint"), which closed on January 1, 2015.
The Company is a global leader in the development and commercialization of technologies and products for wireless, wired and power markets.
The Company’s design expertise and manufacturing capabilities span multiple process technologies. The Company's primary wafer fabrication facilities are in North Carolina, Oregon and Texas. The Company's primary assembly and test facilities are in China, Costa Rica, Germany and Texas. The Company also sources products and materials through external suppliers. The Company operates design, sales and other manufacturing facilities throughout Asia, Europe and North America.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain items in the fiscal years 2021 and 2020 financial statements have been reclassified to conform to the fiscal 2022 presentation.
Accounting Periods
The Company uses a 52- or 53-week fiscal year ending on the Saturday closest to March 31 of each year. The most recent three fiscal years ended on April 2, 2022, April 3, 2021 and March 28, 2020. Fiscal years 2022 and 2020 were 52-week years, and fiscal 2021 was a 53-week year.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent liabilities. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, product warranty obligations, valuation of inventories, tax related contingencies, valuation of long-lived and intangible assets, other contingencies and litigation, among others. The Company generally bases its estimates on historical experience, expected future conditions and third-party evaluations. The inputs into certain of these estimates and assumptions include the consideration of the economic impact of the COVID-19 pandemic. Actual results could differ materially from these estimates, and such differences could affect the operations reported in future periods. As the impact of the COVID-19 pandemic continues to develop, many of these estimates could require increased judgment and carry a higher degree of variability and volatility, and may change materially in future periods.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposit accounts, money market funds, and other temporary, highly liquid investments with original maturities of three months or less when purchased.
Investments
Marketable equity securities consist of common stock in publicly-traded companies and are carried at fair value with both the realized and unrealized gains and losses reported in "Other income (expense), net." Fair values of publicly-traded equity securities are determined using quoted prices in active markets. The marketable equity securities are classified as short-term based on their highly liquid nature and are recorded in "Other current assets" in the Consolidated Balance Sheets.
The Company invests in limited partnerships which are accounted for using the equity method. These equity method investments are classified as "Long-term investments" in the Consolidated Balance Sheets. The Company
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
records its share of the financial results of the limited partnerships in "Other income (expense), net" in the Company's Consolidated Statements of Income.
The Company also invests in privately held companies for which the fair value of the investment is not readily determinable. These equity investments without a readily determinable fair value are measured at cost less impairment, adjusted for any changes in observable prices, and are classified as "Long-term investments" in the Consolidated Balance Sheets. The Company assesses these investments for impairment on a quarterly basis and considers both qualitative and quantitative factors that may have a significant impact on the investee's fair value. Qualitative factors considered include the investee's financial condition and business outlook, market for technology and other relevant events and factors affecting the investee. Investments are impaired when their fair value is less than their carrying value.
Fair Value Measurement
The Company measures and reports certain financial assets and liabilities on a recurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes its financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is described as follows:
•Level 1 - includes instruments for which inputs are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
•Level 2 - includes instruments for which the inputs are other than quoted prices that are observable for the asset or liability, either directly or indirectly, and fair value can be determined through the use of models or other valuation methodologies that do not require significant judgment since the inputs are corroborated by readily observable data.
•Level 3 - includes instruments for which the valuations are based on inputs that are unobservable and significant to the overall fair value measurement. These inputs are supported by little or no market activity and reflect the use of significant management judgment.
The Company also holds assets whose fair value is measured and recorded on a nonrecurring basis. These assets include equity method investments, equity investments without a readily determinable fair value and certain non-financial assets, such as intangible assets and property and equipment.
The carrying values of cash, cash equivalents and restricted cash, accounts receivable, accounts payable and other accrued liabilities approximate fair values because of the relatively short-term maturities of these instruments.
Inventories
Inventories are stated at the lower of cost or net realizable value (cost is based on standard cost, which approximates actual average cost). Cost includes labor, materials and manufacturing overhead related to the purchase and production of inventories. Abnormal production levels are charged to "Cost of goods sold" in the period incurred rather than as a portion of inventory cost.
The Company’s business is subject to the risk of technological and design changes. The Company evaluates inventory levels quarterly against demand forecasts on a material or product family basis to evaluate its overall inventory risk. Reserves are adjusted to reflect inventory values in excess of demand forecasts and management's analysis and assessment of overall inventory risk. In the event the Company sells inventory that had been covered by a specific inventory reserve, the sale is recorded at the actual selling price and the related cost of goods sold is recorded at the full inventory cost, net of the reserve.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Product Warranty
The Company generally sells products with a limited warranty against defects in materials and workmanship and non-conformance to applicable specifications. The majority of the Company’s product warranty claims are settled through the return of the defective product and the shipment of replacement product. Accruals are estimated based upon both our historical experience as well as specifically identified claims. If there is a material increase in the rate of customer claims compared with the Company's historical experience or if the Company's estimates of probable losses relating to specifically identified warranty exposures require revision, the Company may record a charge against future cost of sales. Product warranty accruals and related expenses were immaterial for the periods presented.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, ranging from one to 39 years. The Company capitalizes interest on borrowings related to eligible capital expenditures. Capitalized interest is added to the cost of qualified assets and depreciated together with that asset cost. The Company’s assets acquired under finance leases and leasehold improvements are amortized over the lesser of the asset life or lease term (which is reasonably assured) and included in depreciation. The Company records capital-related government grants earned as a reduction to property and equipment and depreciates such grants over the estimated useful lives of the associated assets.
The Company periodically evaluates the period over which it expects to recover the economic value of the Company’s property and equipment, considering factors such as changes in machinery and equipment technology, the ability to re-use equipment across generations of process technology and historical usage trends. If the Company determines that the useful lives of its assets are shorter or longer than originally estimated, the rate of depreciation is adjusted to reflect the revised useful lives of the assets.
The Company assesses property and equipment for impairment when events or changes in circumstances indicate that the carrying amount of its assets may not be recoverable. Factors that are considered in deciding when to perform an impairment review include an adverse change in the use of the Company’s assets or an expectation that the assets will be sold or otherwise disposed. The Company assesses 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.
Leases
The Company determines that a contract contains a lease at lease inception if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In evaluating whether the right to control an identified asset exists, the Company assesses whether it has the right to direct the use of the identified asset and obtain substantially all of the economic benefit from the use of the identified asset.
Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate in determining the present value of lease payments considering the term of the lease, which is derived from information available at the lease commencement date. The lease term includes renewal options when it is reasonably certain that the option will be exercised and excludes termination options. To the extent that the Company's agreements have variable lease payments, the Company includes variable lease payments that depend on an index or a rate and excludes those that depend on facts or circumstances occurring after the commencement date, other than the passage of time. The Company elected the practical expedient not to separate lease and non-lease components for substantially all of its classes of leases and to account for the combined lease and non-lease components as a single lease component. In addition, the Company made an accounting policy election to exclude leases with an initial term of 12 months or less from the balance sheet.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Business Acquisitions
The Company allocates 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 Company's 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 Company to use 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 the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, the Company’s 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, the Company 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 the Consolidated Statements of Income.
Goodwill Impairment Testing
In accordance with Accounting Standards Codification ("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 the Company's 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, the Company has 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.
The Company establishes its reporting units based on its current organizational structure, product and technology characteristics and the segment management's view of the business. As of January 2, 2022, the Company identified three reporting units within the Mobile Products ("MP") operating segment and two reporting units within the Infrastructure and Defense Products ("IDP") operating segment, and the optional qualitative assessment under ASC 350 was performed 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, the Company considers (i) its overall historical and projected future operating results, (ii) if there was a significant decline in its stock price for a sustained period, (iii) if there was a significant change in its market capitalization relative to its 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, the Company completed its annual qualitative assessments and concluded that based on the relevant events and circumstances, it was more likely than not that four of its five reporting units’ fair values exceeded their related carrying values. However, for one of the Company's MP reporting units (the acquired NextInput, Inc. ("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, it was determined that it was more likely than not that the fair value of the reporting unit was less than its carrying amount, and a quantitative assessment was performed to calculate the fair value of the reporting unit.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The 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 the Company's long-term planning process based on assumed market segment growth rates and its 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, it was determined that the carrying amount of the reporting unit exceeded its fair value, which resulted in a goodwill impairment charge of $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 such fair value determinations of the Company's reporting units are significant judgments and estimates, including assumptions about future revenue, profitability and cash flows, operational plans and the Company's interpretation of current economic indicators and market valuations. To the extent these assumptions are incorrect or there are further declines in the Company's business outlook, additional goodwill impairment charges may be recorded in future periods.
In fiscal 2021, the Company 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
The Company amortizes 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 research and development ("R&D") projects that had not reached technological feasibility as of the date of the acquisition and are initially 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.
The Company evaluates 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 the Company’s business strategy and forecasts) indicate that the carrying amount of the assets may not be recoverable. If such facts and circumstances exist, the Company assesses 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 the Company's fiscal 2022 annual goodwill impairment assessment, the Company also evaluated its 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.
Accrued Liabilities
The "Accrued liabilities" balance as of April 2, 2022 and April 3, 2021, includes accrued compensation and benefits of $113.6 million and $135.4 million, respectively, and interest payable of $19.8 million and $17.5 million, respectively.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Other Current Liabilities
The "Other current liabilities" balance as of April 2, 2022 and April 3, 2021, includes income taxes payable of $87.8 million and $86.7 million, respectively.
Revenue Recognition
The Company generates 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 the Company's customers, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. A majority of the Company's 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 the Company’s distributors is recognized upon shipment of the product to the distributors (sell-in). Revenue is recognized from the Company’s 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). The Company applies 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, the Company’s standard terms and conditions apply. The Company considers a customer's purchase order, which is governed by a sales agreement or the Company’s standard terms and conditions, to be the contract with the customer.
The Company’s pricing terms are negotiated independently, on a stand-alone basis. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects 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. The Company determines variable consideration by estimating the most likely amount of consideration it expects to receive from the customer. The Company's terms and conditions do not give its customers a right of return associated with the original sale of its products. However, the Company may authorize sales returns under certain circumstances, which include courtesy returns and like-kind exchanges. The Company reduces revenue and records 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.
The Company’s accounts receivable balance is from contracts with customers and represents the Company’s unconditional right to receive consideration from its customers. Payments are due upon completion of the performance obligation and subsequent invoicing. Substantially all payments are collected within the Company’s 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.
The Company invoices customers upon shipment and recognizes revenue in accordance with delivery terms. As of April 2, 2022, the Company had $424.7 million in remaining unsatisfied performance obligations with an original duration greater than one year, of which the majority is expected to be recognized as income over the next 12 months.
The Company includes shipping charges billed to customers in "Revenue" and includes 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.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company incurs 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, and therefore, no remaining period exists over which to amortize the commissions.
Research and Development
The Company charges all R&D costs to expense as incurred.
Income Taxes
The Company accounts for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the temporary differences between the financial reporting and tax basis of assets and liabilities and for tax carryforwards. Deferred tax assets and liabilities for each tax jurisdiction are measured using the enacted statutory tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets to the extent the Company determines it is more likely than not that some portion or all of its deferred tax assets will not be realized.
A more likely than not recognition threshold is required to be met before the Company recognizes the benefit of an income tax position in its financial statements. The Company’s policy is to recognize accrued interest and penalties, if incurred, on any unrecognized tax benefits as a component of income tax expense.
It is the Company’s current intent and policy to repatriate certain previously taxed earnings of foreign subsidiaries from outside the U.S. Accordingly, the Company recognizes a deferred tax liability for income taxes on certain unremitted foreign earnings of foreign subsidiaries. For earnings which remain permanently reinvested, it is not practical to estimate the additional tax that would be incurred, if any, if the permanently reinvested earnings were repatriated.
Stock-Based Compensation
Under 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 April 2, 2022, total remaining unearned compensation cost related to unvested restricted stock units was $121.0 million, which will be amortized over the weighted-average remaining service period of approximately 1.2 years.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into U.S. dollars in accordance with ASC 830, "Foreign Currency Matters." The functional currency for most of the Company’s international operations is the U.S. dollar. The functional currency for the remainder of the Company’s foreign subsidiaries is the local currency. Assets and liabilities denominated in foreign currencies are translated using the exchange rates on the balance sheet dates. Revenues and expenses are translated using the weighted average exchange rates throughout the year. Translation adjustments are shown separately as a component of "Accumulated other comprehensive income" within "Stockholders’ equity" in the Consolidated Balance Sheets. Foreign currency transaction gains or losses (transactions denominated in a currency other than the functional currency) are reported in "Other income (expense), net" in the Consolidated Statements of Income.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Accounting Pronouncements Recently Adopted
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update 2019-12, "Simplifying the Accounting for Income Taxes," which eliminated certain exceptions within ASC 740, "Income Taxes" and clarified and simplified other aspects of the current accounting guidance. The Company adopted this standard in the first quarter of fiscal 2022, and it did not have a material impact on the Company's consolidated financial statements.
2. CONCENTRATIONS OF CREDIT RISK
The Company’s principal financial instrument subject to potential concentration of credit risk is accounts receivable, which is unsecured. The Company provides an allowance for doubtful accounts equal to estimated losses expected to be incurred in the collection of accounts receivable. The Company's trade receivables are evaluated on a collective (pool) basis and aggregated on the basis of similar risk characteristics, adjusting for broad-based economic indicators as well as customer specific factors. The Company has adopted credit policies and standards intended to accommodate industry growth and inherent risk and it believes that credit risks are moderated by the financial stability of its major customers, conservative payment terms and the Company’s strict credit policies.
The Company provides products to its largest end customer, Apple Inc., through sales to multiple contract manufacturers, which in the aggregate accounted for approximately 33%, 30% and 33% of total revenue in fiscal years 2022, 2021 and 2020, respectively. Samsung Electronics Co., Ltd., accounted for approximately 11%, 7% and 8% of total revenue in fiscal years 2022, 2021 and 2020, respectively. These customers primarily purchase radio frequency ("RF") solutions for a variety of mobile devices.
The Company's three largest accounts receivable balances comprised approximately 57% and 58% of aggregate gross accounts receivable as of April 2, 2022 and April 3, 2021, respectively.
3. INVENTORIES
The components of inventories, net of reserves, are as follows (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Raw materials | $ | 236,095 | | | $ | 134,959 | |
Work in process | 357,332 | | | 283,067 | |
Finished goods | 162,321 | | | 89,761 | |
Total inventories | $ | 755,748 | | | $ | 507,787 | |
4. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Land | $ | 25,842 | | | $ | 25,842 | |
Building and leasehold improvements | 432,305 | | | 411,180 | |
Machinery and equipment | 2,401,735 | | | 2,282,059 | |
Construction in progress | 128,317 | | | 108,563 | |
Total property and equipment, gross | 2,988,199 | | | 2,827,644 | |
Less accumulated depreciation | (1,734,608) | | | (1,561,613) | |
Total property and equipment, net | $ | 1,253,591 | | | $ | 1,266,031 | |
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. BUSINESS ACQUISITIONS
During fiscal 2022, the Company completed the acquisitions of United Silicon Carbide, Inc. ("United SiC") and NextInput. During fiscal 2021, the Company completed the acquisition of 7Hugs Labs S.A.S. ("7Hugs"). During fiscal 2020, the Company completed the acquisitions of Decawave Limited ("Decawave"), Custom MMIC Design Services, Inc. ("Custom MMIC"), Cavendish Kinetics Limited ("Cavendish") and Active-Semi International, Inc. ("Active-Semi"). The goodwill resulting from these acquisitions is attributed to synergies and other benefits that are expected to be generated from these transactions.
The operating results of these companies, which were not material either individually or in the aggregate, have been included in the Company's consolidated financial statements as of the acquisition dates. As a result, pro forma results of operations for these acquisitions have not been presented.
United Silicon Carbide, Inc.
On October 19, 2021, the Company acquired all the outstanding equity interests of United SiC, a leading manufacturer of silicon carbide ("SiC") power semiconductors, for a total purchase price of $236.6 million. The acquisition expands the Company's offerings to include SiC power products for a range of applications such as electric vehicles, battery charging, IT infrastructure, renewables and circuit protection.
The purchase price was comprised of cash consideration of $227.1 million and contingent consideration of up to $31.3 million which is expected to be paid to the sellers (in the first quarter of fiscal 2024) if certain revenue and gross margin targets are achieved over the period beginning on the acquisition date through December 31, 2022. The estimated fair value of the contingent consideration was $9.5 million as of the acquisition date. At April 2, 2022, the contingent consideration liability was remeasured to a fair value of $17.6 million and is included in "Other long-term liabilities" in the Consolidated Balance Sheet. The increase in the fair value was recognized in "Other operating expense" in the Consolidated Statement of Income. See Note 7 for further information related to the fair value measurement.
The purchase price was preliminarily allocated based on the estimated fair values of the assets acquired and liabilities assumed as follows (in thousands):
| | | | | |
Intangible assets | $ | 145,780 | |
Goodwill | 96,755 | |
Net tangible assets (1) | 18,127 | |
Deferred tax liability, net | (24,036) | |
Total purchase price | $ | 236,626 | |
(1) Includes cash acquired of $5.5 million.
The more significant intangible assets acquired included developed technology of $126.1 million and customer relationships of $19.2 million.
The fair value of the developed technology acquired was determined based on an income approach using the "excess earnings method" which estimated the value of the intangible asset by discounting the future projected earnings of the asset to present value as of the valuation date. The acquired developed technology asset is being amortized on a straight-line basis over its estimated useful life of eleven years.
The fair value of the customer relationships acquired was determined based on an income approach using the "with and without method" in which the value of the intangible asset is determined by the difference in discounted cash flows of the profitability of the Company "with" the asset and the profitability of the Company "without" the asset. These customer relationships are being amortized on a straight-line basis over their estimated useful life of three years.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company will continue to evaluate certain assets, liabilities and tax estimates over the measurement period (up to one year from the acquisition date). Goodwill recognized from the acquisition of United SiC has been assigned to the IDP segment and is not deductible for income tax purposes.
During fiscal 2022, the Company recorded acquisition and integration related costs associated with the acquisition of United SiC totaling $12.2 million in "Other operating expense" in the Consolidated Statement of Income. During fiscal 2022, the Company also recorded $3.6 million of acquisition and integration related costs in "Cost of goods sold" in the Consolidated Statement of Income.
NextInput, Inc.
On April 5, 2021, the Company acquired all the outstanding equity interests of NextInput, a leader in microelectromechanical system ("MEMS")-based sensing solutions, for a total cash purchase price of $173.3 million. The acquisition expands the Company's offerings of MEMS-based products for mobile applications and provides sensing solutions for a broad range of applications in other markets.
The purchase price was preliminarily allocated based on the estimated fair values of the assets acquired and liabilities assumed as follows (in thousands):
| | | | | |
Intangible assets | $ | 81,000 | |
Goodwill | 95,211 | |
Net tangible assets (1) | 7,261 | |
Deferred tax liability, net | (10,158) | |
Total purchase price | $ | 173,314 | |
(1) Includes cash acquired of $5.8 million.
The more significant intangible assets acquired included developed technology of $73.0 million and customer relationships of $7.5 million.
The fair value of the developed technology acquired was determined based on an income approach using the "excess earnings method" described above. The acquired developed technology asset is being amortized on a straight-line basis over its estimated useful life of seven years.
The fair value of the customer relationships acquired was determined based on an income approach using the "with and without method" described above. These customer relationships are being amortized on a straight-line basis over their estimated useful life of one year.
Goodwill recognized from the acquisition of NextInput has been assigned to the MP segment and is not deductible for income tax purposes.
During fiscal years 2022 and 2021, the Company recorded acquisition and integration related costs associated with the acquisition of NextInput totaling $2.7 million and $1.8 million, respectively, in "Other operating expense" in the Consolidated Statements of Income.
In connection with the Company's annual qualitative goodwill impairment assessment, it was determined that the market adoption of the acquired NextInput technology into mobile handsets is expected to be delayed compared to the previous assumptions. As a result, the Company completed a quantitative assessment of its reporting unit, which resulted in a goodwill impairment charge of $48.0 million. See Note 6 for further information on this goodwill impairment charge.
7Hugs Labs S.A.S.
In fiscal 2021, the Company acquired all the outstanding equity interests of 7Hugs, a private developer of ultra-wideband ("UWB") software and solutions, for a total cash purchase price of $48.7 million.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
During fiscal years 2022 and 2021, the Company recorded acquisition and integration related costs associated with the acquisition of 7Hugs totaling $0.2 million and $2.4 million, respectively, in "Other operating expense" in the Consolidated Statements of Income.
Decawave Limited
In fiscal 2020, the Company acquired all the outstanding equity interests of Decawave, a pioneer in UWB technology and provider of UWB solutions for mobile, automotive and Internet of Things ("IoT") applications, for a total cash purchase price of $372.2 million.
During fiscal years 2022, 2021 and 2020, the Company recorded acquisition and integration related costs associated with the acquisition of Decawave totaling $6.7 million, $11.3 million and $12.4 million, respectively, in "Other operating expense" in the Consolidated Statements of Income.
Custom MMIC Design Services, Inc.
In fiscal 2020, the Company acquired all the outstanding equity interests of Custom MMIC, a supplier of high-performance gallium arsenide and gallium nitride monolithic microwave integrated circuits for defense, aerospace and commercial applications, for a total purchase price of $91.7 million.
During fiscal years 2021 and 2020, the Company recorded acquisition and integration related costs associated with the acquisition of Custom MMIC totaling $10.3 million and $9.4 million, respectively, in "Other operating expense" in the Consolidated Statements of Income.
Cavendish Kinetics Limited
In fiscal 2020, the Company completed the acquisition of the remaining issued and outstanding capital of Cavendish for cash consideration of $198.4 million. The purchase of the remaining equity interest in Cavendish was considered to be an acquisition achieved in stages, whereby the previously held equity interest was remeasured at its acquisition-date fair value. This resulted in recognition of a gain of $43.0 million in fiscal 2020, which is recorded in "Other income (expense), net" in the Consolidated Statement of Income.
During fiscal years 2022, 2021 and 2020, the Company recorded acquisition and integration related costs associated with the acquisition of Cavendish totaling less than $0.1 million, $0.7 million and $3.8 million, respectively, in "Other operating expense" in the Consolidated Statements of Income.
Active-Semi International, Inc.
In fiscal 2020, the Company acquired all the outstanding equity interests of Active-Semi, a private fabless supplier of programmable analog power management solutions, for a total cash purchase price of $307.9 million.
During fiscal years 2022, 2021 and 2020, the Company recorded acquisition and integration related costs associated with the acquisition of Active-Semi of $0.2 million, $0.8 million and $25.3 million, respectively, in "Other operating expense" in the Consolidated Statements of Income. During fiscal 2020, the Company also recorded $4.2 million of acquisition and integration related costs in "Cost of goods sold" in the Consolidated Statement of Income.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for fiscal 2022 are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Mobile Products | | Infrastructure and Defense Products | | Total |
Balance as of April 3, 2021 (1) | $ | 2,034,383 | | | $ | 608,325 | | | $ | 2,642,708 | |
Goodwill resulting from NextInput acquisition (Note 5) | 95,211 | | | — | | | 95,211 | |
Goodwill impairment | (48,000) | | | — | | | (48,000) | |
Goodwill resulting from United SiC acquisition (Note 5) | — | | | 96,755 | | | 96,755 | |
7Hugs measurement period adjustments | (97) | | | — | | | (97) | |
Effect of changes in foreign currency exchange rates | (10,943) | | | — | | | (10,943) | |
Balance as of April 2, 2022 (1) | $ | 2,070,554 | | | $ | 705,080 | | | $ | 2,775,634 | |
(1) The Company’s goodwill balance is presented net of accumulated impairment losses and write-offs totaling $669.6 million and $621.6 million as of April 2, 2022 and April 3, 2021, respectively, which were recognized in fiscal years 2009, 2013, 2014 and 2022.
In accordance with ASC 350, the Company reviewed its goodwill for impairment at the reporting unit level on the first day of its fourth quarter of fiscal 2022. The Company first performed the optional qualitative impairment assessments and concluded that based on the relevant events and circumstances it was more likely than not that four of its five reporting units' fair values exceeded their related carrying values. However, for one of its reporting units within the MP segment (the NextInput business), it was determined that the adoption of the acquired NextInput technology into mobile handsets is expected to be delayed compared to the previous assumptions. As a result, the Company determined that it was more likely than not that the fair value of the reporting unit was less than its carrying amount. Therefore, the Company performed a quantitative assessment to calculate the fair value of the reporting unit.
The 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 the Company's long-term planning process based on assumed market segment growth rates and its 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, the carrying amount of the reporting unit exceeded its fair value, which resulted in a goodwill impairment charge of $48.0 million. The goodwill impairment charge is recorded in "Other operating expense" in the fiscal 2022 Statement of Income.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following summarizes information regarding the gross carrying amounts and accumulated amortization of intangible assets (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Developed technology | $ | 1,026,690 | | | $ | 420,255 | | | $ | 1,295,113 | | | $ | 750,044 | |
Customer relationships | 104,778 | | | 47,208 | | | 459,052 | | | 403,407 | |
Technology licenses | 2,641 | | | 2,169 | | | 2,368 | | | 2,076 | |
Backlog | — | | | — | | | 1,600 | | | 1,600 | |
Trade names | 1,933 | | | 1,358 | | | 1,090 | | | 636 | |
IPRD | 9,734 | | | N/A | | 9,695 | | | N/A |
Total (1) | $ | 1,145,776 | | | $ | 470,990 | | | $ | 1,768,918 | | | $ | 1,157,763 | |
(1) Amounts include the impact of foreign currency translation.
At the beginning of each fiscal year, the Company removes the gross asset and accumulated amortization amounts of intangible assets that have reached the end of their useful lives and have been fully amortized. Useful lives are estimated based on the expected economic benefit to be derived from the intangible assets.
Total intangible assets amortization expense was $150.5 million, $252.9 million and $247.3 million in fiscal years 2022, 2021 and 2020, respectively.
The following table provides the Company's estimated amortization expense for intangible assets based on current amortization periods for the periods indicated (in thousands):
| | | | | |
Fiscal Year | Estimated Amortization Expense |
2023 | $ | 134,000 | |
2024 | 122,000 | |
2025 | 105,000 | |
2026 | 94,000 | |
2027 | 82,000 | |
7. INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Equity Method Investments
The Company invests in limited partnerships and accounts for these investments using the equity method. The carrying amounts of these investments as of April 2, 2022 and April 3, 2021 were $27.1 million and $29.8 million, respectively, and are classified as "Long-term investments" in the Consolidated Balance Sheets. During fiscal years 2022 and 2021, the Company recorded income of $12.0 million and $21.5 million, respectively, based on its share of the limited partnerships' earnings in "Other income (expense), net" in the Consolidated Statements of Income. The Company received cash distributions totaling $14.8 million and $5.9 million during fiscal years 2022 and 2021, respectively. The cash distributions were recognized as reductions to the carrying value of the investments and included in the cash flows from investing activities in the Consolidated Statements of Cash Flows.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Fair Value of Financial Instruments
The fair value of the financial assets and liabilities measured on a recurring basis as determined using the following levels of inputs (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Total | | Quoted Prices In Active Markets For Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
April 2, 2022 | | | | | | | | |
| | Marketable equity securities | $ | 2,906 | | | $ | 2,906 | | | $ | — | | | $ | — | | |
| | Invested funds in deferred compensation plan (1) | 39,356 | | | 39,356 | | | — | | | — | | |
| | Contingent earn-out liability (2) | (17,600) | | | — | | | — | | | (17,600) | | |
| | | | | | | | | | | | |
April 3, 2021 | | | | | | | | |
| | Marketable equity securities | $ | 3,802 | | | $ | 3,802 | | | $ | — | | | $ | — | | |
| | Invested funds in deferred compensation plan (1) | 32,824 | | | 32,824 | | | — | | | — | | |
| | Contingent earn-out liability (3) | (10,000) | | | — | | | — | | | (10,000) | | |
(1) Invested funds under the Company's non-qualified deferred compensation plan are held in a rabbi trust and consist of mutual funds. The fair value of the mutual funds is calculated using the net asset value per share as determined by quoted active market prices of the underlying investments. See Note 10 for further information on the Company's non-qualified deferred compensation plan.
(2) The Company recorded a contingent earn-out liability in conjunction with the acquisition of United SiC (see Note 5). The fair value of this liability is estimated using an option pricing model.
(3) The Company recorded a contingent earn-out liability in conjunction with the acquisition of Custom MMIC. As of April 3, 2021, the fair value of the contingent consideration liability was equal to the maximum amount payable which was paid during fiscal 2022.
8. LEASES
The Company leases certain of its corporate, manufacturing and other facilities from multiple third-party real estate developers. The Company also leases various machinery and office equipment. These operating leases expire at various dates through 2036, and some of these leases have renewal options, with the longest ranging up to two, ten-year periods.
Operating leases are classified as follows (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Other non-current assets | $ | 73,683 | | | $ | 62,925 | |
Other current liabilities | $ | 17,393 | | | $ | 15,068 | |
Other long-term liabilities | $ | 61,511 | | | $ | 53,172 | |
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Details of operating leases are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
Operating lease expense | $ | 19,178 | | | $ | 17,382 | | | $ | 15,184 | |
Short-term lease expense | $ | 7,726 | | | $ | 7,062 | | | $ | 6,878 | |
Variable lease expense | $ | 4,886 | | | $ | 3,972 | | | $ | 3,098 | |
| | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 20,536 | | | $ | 18,697 | | | $ | 16,504 | |
| | | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 29,210 | | | $ | 12,899 | | | $ | 13,201 | |
The weighted-average remaining lease term and weighted-average discount rates for operating leases are as follows:
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Weighted-average remaining lease term (years) | 6.9 | | 7.9 |
Weighted-average discount rate | 2.99 | % | | 3.82 | % |
The aggregate future lease payments for operating leases as of April 2, 2022 are as follows (in thousands):
| | | | | |
Fiscal Year | Lease Payments |
2023 | $ | 19,449 | |
2024 | 16,305 | |
2025 | 11,555 | |
2026 | 10,430 | |
2027 | 9,055 | |
Thereafter | 21,522 | |
Total future lease payments | 88,316 | |
Less imputed interest | (9,412) | |
Present value of lease liabilities | $ | 78,904 | |
In fiscal 2018, the Company entered into a lease for a facility in Beijing, China that will allow the Company to consolidate several leased facilities as well as provide additional manufacturing space. The lease term is expected to commence in fiscal 2023 and therefore, is not recorded on the Consolidated Balance Sheets as of April 2, 2022 and April 3, 2021. The lease has an initial term of five years and includes multiple renewal options, with the maximum lease term not to exceed 30 years. Upon lease commencement, $10.0 million of right-of-use assets and lease liabilities is expected to be recognized by the Company.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
| | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 | |
Term loan | $ | — | | | $ | 197,500 | | |
1.750% senior notes due 2024 | 500,000 | | | — | | |
4.375% senior notes due 2029 | 850,000 | | | 850,000 | | |
3.375% senior notes due 2031 | 700,000 | | | 700,000 | | |
Finance leases and other | 2,581 | | | 1,617 | | |
Unamortized premium, discount and issuance costs, net | (4,692) | | | (1,475) | | |
Less current portion of long-term debt | (791) | | | (5,092) | | |
Total long-term debt | $ | 2,047,098 | | | $ | 1,742,550 | | |
Credit Agreement
On September 29, 2020, the Company and certain of its U.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") with Bank of America, N.A., acting as administrative agent (the "Administrative Agent"), and a syndicate of lenders. The 2020 Credit Agreement amended and restated the previous credit agreement dated as of December 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, the Company may request one or more additional tranches of term loans or increases to the Revolving Facility, up to an aggregate of $500.0 million and subject to, among other things, securing additional funding commitments from the existing or new lenders.
On April 6, 2022, the Company and the Administrative Agent entered into an amendment to the 2020 Credit Agreement (the “LIBOR Transition Amendment”) to replace the London Interbank Offered Rate as a reference rate available for use in the computation of interest under the 2020 Credit Agreement. As a result of the LIBOR Transition Amendment, at the Company’s option, loans under the 2020 Credit Agreement will bear interest at (i) the Applicable Rate (as defined in the 2020 Credit Agreement) plus the Term SOFR (as defined in the 2020 Credit Agreement) or (ii) the Applicable Rate plus a rate equal to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate as set by the Administrative Agent, and (c) the Term SOFR plus 1.0% (the "Base Rate"). All swing line loans will bear interest at a rate equal to the Applicable Rate plus the Base Rate. The Term SOFR is the rate per annum equal to the forward-looking Secured Overnight Financing Rate term rate for interest periods of one, three or six months (as selected by the Company) plus an adjustment (as defined in the 2020 Credit Agreement). The Applicable Rate for Term SOFR loans ranges from 1.000% per annum to 1.250% per annum, and the Applicable Rate for Base Rate loans ranges from 0.000% per annum to 0.250% per annum. Undrawn amounts under the Credit Facility are subject to a commitment fee ranging from 0.150% to 0.200%.
During fiscal 2022, there were no borrowings under the Revolving Facility.
During fiscal 2021, the Company 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, the Company 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, the Company made principal payments totaling $2.5 million on the 2020 Term Loan. During fiscal 2022, the Company repaid the remaining principal balance of $197.5 million on the 2020 Term Loan. Interest
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
paid on the 2017 Term Loan and the 2020 Term Loan during fiscal years 2022, 2021 and 2020 was $1.7 million, $2.1 million and $2.4 million, respectively.
The 2020 Credit Agreement contains various conditions, covenants and representations with which the Company must be in compliance in order to borrow funds and to avoid an event of default. As of April 2, 2022, the Company was in compliance with these covenants.
Senior Notes due 2024
On December 14, 2021, the Company issued $500.0 million aggregate principal amount of its 1.750% senior notes due 2024 (the "2024 Notes"). Interest is payable on the 2024 Notes on June 15 and December 15 of each year, commencing June 15, 2022. The 2024 Notes will mature on December 15, 2024, unless earlier redeemed in accordance with their terms. The 2024 Notes are senior unsecured obligations of the Company and are guaranteed, jointly and severally, by the Guarantors.
The Company used a portion of the net proceeds of the offering of the 2024 Notes to repay all of the outstanding 2020 Term Loan, as described above, and will use the remainder of the net proceeds for general corporate purposes.
The 2024 Notes were issued pursuant to an indenture, dated as of December 14, 2021 (the "2021 Indenture"), by and among the Company, the Guarantors and Computershare Trust Company, N.A., as trustee. The 2021 Indenture contains customary events of default, including payment default, exchange default, failure to provide certain notices thereunder and certain provisions related to bankruptcy events. The 2021 Indenture also contains customary negative covenants.
The 2024 Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws, and, unless so registered, may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws.
In connection with the offering of the 2024 Notes, the Company entered into a Registration Rights Agreement, dated as of December 14, 2021 (the "Registration Rights Agreement"), by and among the Company and the Guarantors, on the one hand, and BofA Securities, Inc., as representative of the initial purchasers of the 2024 Notes, on the other hand.
Under the Registration Rights Agreement, the Company and the Guarantors have agreed to use their commercially reasonable efforts to (i) file with the SEC a registration statement (the "Exchange Offer Registration Statement") relating to the registered exchange offer (the "Exchange Offer") to exchange the 2024 Notes for a new series of the Company’s exchange notes having terms substantially identical in all material respects to, and in the same aggregate principal amount as, the 2024 Notes; (ii) cause the Exchange Offer Registration Statement to be declared effective by the SEC; and (iii) cause the Exchange Offer to be consummated no later than the 720th day after December 14, 2021 (or if such 720th day is not a business day, the next succeeding business day).
Under certain circumstances, the Company and the Guarantors have agreed to use their commercially reasonable efforts to (i) file a shelf registration statement relating to the resale of the 2024 Notes as promptly as practicable, and (ii) cause the shelf registration statement to be declared effective by the SEC as promptly as practicable.
If the Company fails to meet any of these targets, the annual interest rate on the 2024 Notes will increase by 0.25% during the 90-day period following the default and will increase by an additional 0.25% for each subsequent 90-day period during which the default continues, up to a maximum additional interest rate of 1.00% per year. If the Company cures the default, the interest rate on the 2024 Notes will revert to the original level.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Senior Notes due 2029
On September 30, 2019, the Company issued $350.0 million aggregate principal amount of its 4.375% senior notes due 2029 (the "Initial 2029 Notes"). On December 20, 2019 and June 11, 2020, the Company issued an additional $200.0 million and $300.0 million, respectively, aggregate principal amount of such notes (together, the "Additional 2029 Notes" and collectively with the Initial 2029 Notes, the "2029 Notes"). The 2029 Notes will mature on October 15, 2029, unless earlier redeemed in accordance with their terms. The 2029 Notes are senior unsecured obligations of the Company and are guaranteed, jointly and severally, by the Guarantors.
The Initial 2029 Notes were issued pursuant to an indenture, dated as of September 30, 2019, by and among the Company, the Guarantors and MUFG Union Bank, N.A., as trustee, and the Additional 2029 Notes were issued pursuant to supplemental indentures, dated as of December 20, 2019 and June 11, 2020 (such indenture and supplemental indentures, collectively, the "2019 Indenture"). The 2019 Indenture contains substantially the same customary events of default and negative covenants as the 2021 Indenture.
At any time prior to October 15, 2024, the Company may redeem all or part of the 2029 Notes, at a redemption price equal to 100% of their principal amount, plus a "make whole" premium as of the redemption date, and accrued and unpaid interest. In addition, at any time prior to October 15, 2024, the Company may redeem up to 35% of the original aggregate principal amount of the 2029 Notes with the proceeds of one or more equity offerings, at a redemption price equal to 104.375%, plus accrued and unpaid interest. Furthermore, at any time on or after October 15, 2024, the Company may redeem the 2029 Notes, in whole or in part, at the redemption prices specified in the 2019 Indenture, plus accrued and unpaid interest.
Interest is payable on the 2029 Notes on April 15 and October 15 of each year. Interest paid on the 2029 Notes during fiscal years 2022 and 2021 was $37.2 million and $31.6 million, respectively.
Senior Notes due 2031
On September 29, 2020, the Company issued $700.0 million aggregate principal amount of its 3.375% senior notes due 2031 (the "2031 Notes"). The 2031 Notes will mature on April 1, 2031, unless earlier redeemed in accordance with their terms. The 2031 Notes are senior unsecured obligations of the Company and are guaranteed, jointly and severally, by the Guarantors.
The 2031 Notes were issued pursuant to an indenture, dated as of September 29, 2020, by and among the Company, the Guarantors and MUFG Union Bank, N.A., as trustee (the "2020 Indenture"). The 2020 Indenture contains substantially the same customary events of default and negative covenants as the 2021 Indenture.
At any time prior to April 1, 2026, the Company may redeem all or part of the 2031 Notes, at a redemption price equal to 100% of their principal amount, plus a "make whole" premium as of the redemption date, and accrued and unpaid interest. In addition, at any time prior to April 1, 2026, the Company may redeem up to 40% of the original aggregate principal amount of the 2031 Notes with the proceeds of one or more equity offerings, at a redemption price equal to 103.375%, plus accrued and unpaid interest. Furthermore, at any time on or after April 1, 2026, the Company may redeem the 2031 Notes, in whole or in part, at the redemption prices specified in the 2020 Indenture, plus accrued and unpaid interest.
The 2031 Notes have not been and will not be registered under the Securities Act, or any state securities laws, and may not be offered or sold in the United States absent an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws.
Interest is payable on the 2031 Notes on April 1 and October 1 of each year. Interest paid on the 2031 Notes during fiscal years 2022 and 2021 was $23.6 million and $11.9 million, respectively.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Senior Notes due 2025
On December 1, 2020, the Company redeemed the remaining $23.4 million principal amount of its 7.00% senior notes due December 1, 2025 (the "2025 Notes") using cash on hand, at a redemption price equal to 103.50% of the principal amount, plus accrued and unpaid interest. Interest paid on the 2025 Notes during both fiscal years 2021 and 2020 was $1.6 million.
Senior Notes due 2026
On October 16, 2020, the Company redeemed the $900.0 million aggregate principal amount of its 5.50% senior notes due July 15, 2026 (the "2026 Notes") at a redemption price equal to 106.363% of the $900.0 million principal amount, plus accrued and unpaid interest. The 2026 Notes were redeemed using proceeds from the issuance of the 2031 Notes combined with cash on hand plus borrowings under the 2020 Term Loan. In connection with the redemption, the Company recognized a loss on debt extinguishment of $61.0 million as "Other (expense) income, net" in the fiscal 2021 Consolidated Statement of Income. The loss on debt extinguishment consisted of a $57.3 million redemption premium and a $3.7 million net write-off of unamortized debt issuance costs and bond premium. The primary purpose of the redemption was to reduce future interest expense.
Interest paid on the 2026 Notes during fiscal years 2021 and 2020 was $37.3 million and $49.5 million, respectively.
Fair Value of Long-Term Debt
The Company's debt is carried at amortized cost and is measured at fair value quarterly for disclosure purposes. The estimated fair value of the 2024 Notes, the 2029 Notes and the 2031 Notes as of April 2, 2022 was $476.9 million, $852.6 million and $638.6 million, respectively (compared to the outstanding principal amount of $500.0 million, $850.0 million and $700.0 million, respectively). The estimated fair value of the 2029 Notes and the 2031 Notes as of April 3, 2021 was $905.3 million and $689.5 million, respectively (compared to the outstanding principal amount of $850.0 million and $700.0 million, respectively). The Company considers its debt to be Level 2 in the fair value hierarchy. Fair values are estimated based on quoted market prices for identical or similar instruments. The 2024 Notes, the 2029 Notes and the 2031 Notes currently trade over-the-counter and the fair values were estimated based upon the value of the last trade at the end of the period.
Interest Expense
During fiscal 2022, the Company recognized $67.0 million of interest expense primarily related to the 2029 Notes and the 2031 Notes, which was partially offset by $3.7 million of interest capitalized to property and equipment. During fiscal 2021, the Company recognized $79.3 million of interest expense primarily related to the 2026 Notes (redeemed on October 16, 2020), the 2029 Notes and the 2031 Notes, which was partially offset by $4.1 million of interest capitalized to property and equipment. During fiscal 2020, the Company recognized $66.0 million of interest expense primarily related to the 2026 Notes and the 2029 Notes, which was partially offset by $5.6 million of interest capitalized to property and equipment.
10. RETIREMENT BENEFIT PLANS
Defined Contribution Plans
The Company offers tax-beneficial retirement contribution plans to eligible employees in the U.S. and certain other countries. Eligible employees in certain countries outside of the U.S. are eligible to participate in stakeholder, group or national pension plans with differing eligibility and contributory requirements based on local and national regulations. U.S. employees are eligible to participate in the Company's fully qualified 401(k) plan 30 days after their date of hire. An employee may contribute and invest pretax and/or Roth dollars into the 401(k) plan up to the maximum legal limits (as defined by Federal regulations). Employer contributions to the 401(k) plan are made at the discretion of the Company’s Board of Directors. Employees are immediately vested in their own contributions as well as employer matching contributions.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
In total, the Company contributed $17.6 million, $15.6 million and $14.4 million to its domestic and foreign defined contribution plans during fiscal years 2022, 2021 and 2020, respectively.
Defined Benefit Pension Plans
The Company maintains two qualified defined benefit pension plans for its subsidiaries located in Germany. One of the plans is funded through a self-paid reinsurance program with assets valued at $3.8 million as of April 2, 2022 and April 3, 2021 (included in "Other non-current assets" in the Consolidated Balance Sheets). The pension benefit obligations of both plans were $12.1 million and $14.0 million as of April 2, 2022 and April 3, 2021, respectively, which is included in "Accrued liabilities" and "Other long-term liabilities" in the Consolidated Balance Sheets. The benefit obligations for the plans are calculated annually by an independent actuary and require the use of significant judgement including assumptions based on local economic conditions. The net periodic benefit cost was approximately $0.6 million for each of the last three fiscal years.
Non-Qualified Deferred Compensation Plan
Certain employees and members of the Board of Directors are eligible to participate in the Company's Non-Qualified Deferred Compensation Plan ("NQDC Plan"). The NQDC Plan provides eligible participants the opportunity to defer and invest a specified percentage of their cash compensation. The NQDC Plan is a non-qualified plan that is maintained in a rabbi trust, which restricts the Company's use and access to the assets held, but is subject to the claims of the Company's creditors in the event that the Company becomes insolvent. The amount of compensation to be deferred by each participant is based on their own elections and is adjusted for any investment changes that the participant directs. This plan does not provide for employer contributions. The deferred compensation obligation and the fair value of the investments held in the rabbi trust were $39.4 million and $32.8 million as of April 2, 2022 and April 3, 2021, respectively. The current portion of the deferred compensation obligation and fair value of the assets held in the rabbi trust were $1.5 million and $1.2 million as of April 2, 2022 and April 3, 2021, respectively, and are included in "Other current assets" and "Accrued liabilities" in the Consolidated Balance Sheets. The non-current portion of the deferred compensation obligation and fair value of the assets held in the rabbi trust were $37.9 million and $31.6 million as of April 2, 2022 and April 3, 2021, respectively, and are included in "Other non-current assets" and "Other long-term liabilities" in the Consolidated Balance Sheets.
11. COMMITMENTS AND CONTINGENT LIABILITIES
Purchase Obligations
As of April 2, 2022, the Company's purchase obligations (including capital commitments) totaled approximately $2,156.7 million, of which approximately $1,018.6 million is expected to be paid during fiscal 2023. In subsequent years, the Company expects to pay approximately $495.3 million, $405.9 million, $236.6 million and $0.3 million related to these purchase obligations during fiscal years 2024, 2025, 2026 and 2027, respectively. Noncancelable purchase obligations represent payments due related to the purchase of materials, manufacturing services and property and equipment, a majority of which are not recorded as liabilities in the Consolidated Balance Sheet because the Company has not received the related goods or services as of April 2, 2022.
Amidst ongoing industry-wide supply constraints, the Company entered into a long-term capacity reservation agreement with a foundry supplier during the second quarter ended October 2, 2021. The Company agreed to pay certain fees and deposits which are recorded in "Prepaid expenses" and "Other non-current assets" in the Consolidated Balance Sheet as of April 2, 2022. Under the agreement the Company is required to purchase, and the foundry supplier is required to supply, a certain number of wafers (at predetermined sales prices) for calendar years 2022 through 2025. As of April 2, 2022, the Company estimates that it is obligated to purchase approximately $1.4 billion of wafers (included in the total purchase obligations above) under the capacity reservation agreement.
Lease Commitments
See Note 8 for disclosures related to lease commitments.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Legal Matters
The Company is involved in various legal proceedings and claims that have arisen in the ordinary course of business that have not been fully adjudicated. The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company regularly evaluates developments in its legal matters that could affect the amount of the previously accrued liability and records adjustments as appropriate. Although it is not possible to predict with certainty the outcome of the unresolved legal matters, it is the opinion of management that these matters will not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial position or results of operations. The aggregate range of reasonably possible losses in excess of accrued liabilities, if any, associated with these unresolved legal matters is not material.
12. RESTRUCTURING
During fiscal years 2022, 2021 and 2020, the Company recorded restructuring related charges totaling approximately $2.1 million, $2.7 million and $47.9 million, respectively, related primarily to fiscal 2019 actions to reduce operating expenses and improve manufacturing cost structure and other individually immaterial restructuring plans. Restructuring accrual balances were immaterial as of April 2, 2022 and April 3, 2021.
13. INCOME TAXES
Income (loss) before income taxes consists of the following components (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
United States | $ | 69,938 | | | $ | 125,362 | | | $ | (226,005) | |
Foreign | 1,111,146 | | | 682,018 | | | 621,094 | |
Total | $ | 1,181,084 | | | $ | 807,380 | | | $ | 395,089 | |
The components of the income tax provision are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
Current tax expense: | | | | | |
Federal | $ | (16,886) | | | $ | (11,043) | | | $ | (6,705) | |
State | (274) | | | (140) | | | (93) | |
Foreign | (98,696) | | | (80,722) | | | (65,065) | |
| (115,856) | | | (91,905) | | | (71,863) | |
Deferred tax (expense) benefit: | | | | | |
Federal | $ | (18,398) | | | $ | (35,545) | | | $ | 7,826 | |
State | (2,762) | | | (3,771) | | | 4,603 | |
Foreign | (10,715) | | | 57,452 | | | (1,330) | |
| (31,875) | | | 18,136 | | | 11,099 | |
Total | $ | (147,731) | | | $ | (73,769) | | | $ | (60,764) | |
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
A reconciliation of the provision for income taxes to income tax expense computed by applying the statutory federal income tax rate to pre-tax income for fiscal years 2022, 2021 and 2020 is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
| Amount | Percentage | | Amount | Percentage | | Amount | Percentage |
Income tax expense at statutory federal rate | $ | (248,028) | | 21.0 | % | | $ | (169,550) | | 21.0 | % | | $ | (82,969) | | 21.0 | % |
(Increase) decrease resulting from: | | | | | | | | |
State (expense)/benefit, net of federal impact | (1,888) | | 0.2 | | | (743) | | 0.1 | | | 2,605 | | (0.7) | |
Tax credits | 118,877 | | (10.1) | | | 92,532 | | (11.5) | | | 64,017 | | (16.2) | |
Effect of changes in income tax rate applied to net deferred tax assets (1) | (25,679) | | 2.2 | | | 22,286 | | (2.8) | | | (2,269) | | 0.6 | |
Foreign tax rate difference | 148,932 | | (12.6) | | | 85,851 | | (10.6) | | | 75,247 | | (19.0) | |
Foreign permanent differences and related items | 786 | | (0.1) | | | 9,026 | | (1.1) | | | (5,446) | | 1.4 | |
Change in valuation allowance | 231 | | (0.1) | | | (1,232) | | 0.2 | | | 6,438 | | (1.6) | |
Expiration of state and foreign attributes | (3,048) | | 0.3 | | | (1,656) | | 0.2 | | | (5,165) | | 1.3 | |
Stock-based compensation | 11,148 | | (0.9) | | | 9,545 | | (1.2) | | | (1,707) | | 0.4 | |
Tax reserve adjustments | (3,262) | | 0.3 | | | (9,979) | | 1.2 | | | (13,973) | | 3.5 | |
U.S. tax on foreign earnings, including GILTI & FDII (2) | (130,874) | | 11.1 | | | (100,830) | | 12.5 | | | (81,916) | | 20.8 | |
Permanent reinvestment assertion | (1,033) | | 0.1 | | | (8,488) | | 1.1 | | | (6,814) | | 1.7 | |
Impairments and acquisition related adjustments | (12,198) | | 1.0 | | | (919) | | 0.1 | | | (7,257) | | 1.8 | |
Other income tax (expense) benefit | (1,695) | | 0.1 | | | 388 | | (0.1) | | | (1,555) | | 0.4 | |
| $ | (147,731) | | 12.5 | % | | $ | (73,769) | | 9.1 | % | | $ | (60,764) | | 15.4 | % |
(1) In fiscal 2022, the Company negotiated an extension to its tax holiday in Singapore, resulting in the revaluation of its deferred tax assets. As a result, the Company recognized an income tax expense of $26.4 million due to the reduced tax rate, in part from a reversal of the tax benefit recognized in fiscal 2021. In fiscal 2021, the Company completed the restructuring of the Cavendish intellectual property, resulting in the recognition of an income tax benefit of $22.1 million in Singapore.
(2) The Global Intangible Low-Taxed Income ("GILTI") and Foreign-Derived Intangible Income ("FDII") provisions became effective for the Company in fiscal 2019, at which time the Company elected to treat taxes due on future GILTI inclusions in U.S. taxable income as current-period expense (the "period cost method").
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the basis used for income tax purposes. The deferred income tax assets and liabilities are measured in each taxing jurisdiction using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Significant components of the Company’s net deferred income taxes are as follows (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Deferred income tax assets: | | | |
Inventory reserve | $ | 11,592 | | | $ | 9,632 | |
Equity compensation | 13,085 | | | 14,444 | |
Net operating loss carry-forwards | 27,024 | | | 24,474 | |
Research and other credits | 56,735 | | | 106,825 | |
Employee benefits | 21,104 | | | 19,357 | |
Lease liabilities | 17,905 | | | 15,947 | |
Other deferred assets | 10,332 | | | 8,662 | |
Total deferred income tax assets | 157,777 | | | 199,341 | |
Valuation allowance | (36,281) | | | (36,512) | |
Total deferred income tax assets, net of valuation allowance | $ | 121,496 | | | $ | 162,829 | |
| | | |
Deferred income tax liabilities: | | | |
Amortization and purchase accounting basis difference | $ | (73,412) | | | $ | (25,553) | |
Accumulated depreciation/basis difference | (53,425) | | | (59,756) | |
Accrued tax on unremitted foreign earnings | (22,988) | | | (21,747) | |
Deferred intercompany revenue (1) | — | | | (22,284) | |
Right-of-use assets | (16,591) | | | (14,663) | |
Other deferred liabilities | (2,884) | | | (1,681) | |
Total deferred income tax liabilities | (169,300) | | | (145,684) | |
Net deferred income tax (liability) asset | $ | (47,804) | | | $ | 17,145 | |
| | | |
Amounts included in the Consolidated Balance Sheets: | | | |
Other non-current assets | $ | 36,824 | | | $ | 59,056 | |
Other long-term liabilities | (84,628) | | | (41,911) | |
Net deferred income tax (liability) asset | $ | (47,804) | | | $ | 17,145 | |
(1) In fiscal 2021, the Company completed the intercompany restructuring of the Cavendish intellectual property. Due to this transaction, a portion of revenue recognized by the intercompany seller is taxable in future years. The remaining deferred intercompany revenue was taxed during fiscal 2022.
The Company has recorded a valuation allowance against certain U.S. and foreign deferred tax assets as of April 2, 2022 and April 3, 2021. These valuation allowances were established based upon management's opinion that it is more likely than not (a likelihood of more than 50 percent) that the benefit of these deferred tax assets may not be realized.
The valuation allowance against deferred tax assets decreased by approximately $0.2 million in fiscal 2022. The decrease was comprised of a $1.6 million decrease for the valuation allowance against deferred tax assets for net operating losses and other deferred tax assets at foreign subsidiaries and a $1.4 million increase in the valuation allowance against certain domestic deferred tax assets for net operating losses and credits. At the end of fiscal 2022, a $1.3 million valuation allowance remained against deferred tax assets at foreign subsidiaries, and a $34.9 million valuation allowance remained against domestic deferred tax assets.
The valuation allowance against deferred tax assets increased by $1.2 million in fiscal 2021. The increase was comprised of a $2.1 million increase in the valuation allowance against certain domestic deferred tax assets for net operating losses and credits and a $0.9 million decrease for the valuation allowance against deferred tax assets for net operating losses at foreign subsidiaries. At the end of fiscal 2021, a $2.9 million valuation allowance remained against deferred tax assets at foreign subsidiaries, and a $33.6 million valuation allowance remained against state deferred tax assets.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The valuation allowance against deferred tax assets decreased by $5.2 million in fiscal 2020. The decrease was comprised of a $7.9 million decrease in the valuation allowance against state deferred tax assets for net operating losses and tax credits and a $2.7 million increase for the valuation allowance against deferred tax assets for net operating losses at foreign subsidiaries. At the end of fiscal 2020, a $3.8 million valuation allowance remained against deferred tax assets at foreign subsidiaries, and a $31.5 million valuation allowance remained against state deferred tax assets.
As of April 2, 2022, the Company had federal loss carryovers of approximately $53.3 million that expire in fiscal years 2023 to 2042, if unused, and state losses of approximately $122.2 million that expire in fiscal years 2023 to 2042, if unused. Federal research credits of $110.2 million, and state credits of $65.4 million expire in fiscal years 2031 to 2042 and 2023 to 2042, respectively. The Company had foreign losses of $100.0 million, which expire in fiscal years 2023 to 2032, if unused. The utilization of acquired domestic tax assets is subject to certain annual limitations as required under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") and similar state income tax provisions.
The Company has continued to expand its operations and increase its investments in numerous international jurisdictions. These activities expose the Company to taxation in multiple foreign jurisdictions. As a result, management has concluded that it is not permanently reinvested on certain earnings of its foreign subsidiaries which have been subject to U.S. federal taxation. The remainder of the Company's untaxed foreign earnings and historic investments will continue to be permanently reinvested to fund working capital requirements and operations abroad. It is not practical to estimate the additional tax that would be incurred, if any, if the remainder of the permanently reinvested earnings were repatriated.
The Company has foreign subsidiaries with tax holiday agreements in Costa Rica and Singapore. The Company’s tax holiday in Costa Rica is set to expire in December 2027. During fiscal 2022, the Company negotiated an extension to its tax holiday in Singapore, now expiring in December 2031. Incentives from these countries are subject to the Company meeting certain employment and investment requirements. Relative to the statutory tax rate, income tax expense decreased by $128.4 million (an impact of approximately $1.17 and $1.15 per basic and diluted share, respectively) in fiscal 2022 and $74.3 million (an impact of approximately $0.65 and $0.64 per basic and diluted share, respectively) in fiscal 2021 as a result of these agreements.
The Company’s gross unrecognized tax benefits totaled $144.1 million as of April 2, 2022, $134.1 million as of April 3, 2021, and $119.2 million as of March 28, 2020. Of these amounts, $137.5 million, $128.7 million and $114.8 million as of April 2, 2022, April 3, 2021 and March 28, 2020, respectively, represent the amounts of unrecognized tax benefits that, if recognized, would impact the effective tax rate in each of the fiscal years.
The Company’s gross unrecognized tax benefits increased from $134.1 million as of April 3, 2021 to $144.1 million as of April 2, 2022, primarily due to increases related to current year tax positions, the effect of provision-to-return adjustments on prior year positions and increases related to business combinations recognized as part of purchase accounting.
A reconciliation of fiscal 2020 through fiscal 2022 beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
Beginning balance | $ | 134,068 | | | $ | 119,222 | | | $ | 103,178 | |
Additions based on positions related to current year | 11,826 | | | 10,048 | | | 10,357 | |
Additions for tax positions in prior years | 3,049 | | | 6,240 | | | 6,484 | |
Reductions for tax positions in prior years | (1,669) | | | (348) | | | (69) | |
Expiration of statute of limitations | (3,219) | | | (1,094) | | | (728) | |
Settlements | — | | | — | | | — | |
Ending balance | $ | 144,055 | | | $ | 134,068 | | | $ | 119,222 | |
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
It is the Company’s policy to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. During fiscal years 2022, 2021 and 2020, the Company recognized $(5.1) million, $0.8 million and $0.7 million, respectively, of interest and penalties related to uncertain tax positions. Accrued interest and penalties related to unrecognized tax benefits totaled $1.0 million, $6.2 million and $5.4 million as of April 2, 2022, April 3, 2021 and March 28, 2020, respectively.
The unrecognized tax benefits of $144.1 million and accrued interest and penalties of $1.0 million at the end of fiscal 2022 are recorded on the Consolidated Balance Sheet as a $13.8 million other long-term liability, with the balance reducing the carrying value of the gross deferred tax assets.
Due to uncertainties regarding the timing of examinations and the amount of settlements that may be paid, if any, to tax authorities, the Company currently believes it is reasonably possible that only a minimal amount of gross unrecognized tax benefits will be reduced for tax positions taken in prior years within the next 12 months.
Qorvo files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and international jurisdictions. Qorvo’s fiscal 2019 U.S. federal and state tax returns and subsequent tax years remain open for examination, as well as all attributes brought forward into those years. The Company is also subject to examination by various international tax authorities. The tax years subject to examination vary by jurisdiction.
14. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
Numerator: | | | | | |
Numerator for basic and diluted net income per share — net income available to common stockholders | $ | 1,033,353 | | | $ | 733,611 | | | $ | 334,325 | |
Denominator: | | | | | |
Denominator for basic net income per share — weighted average shares | 110,196 | | | 114,034 | | | 117,007 | |
Effect of dilutive securities: | | | | | |
Stock-based awards | 1,350 | | | 1,982 | | | 2,286 | |
Denominator for diluted net income per share — adjusted weighted average shares and assumed conversions | 111,546 | | | 116,016 | | | 119,293 | |
Basic net income per share | $ | 9.38 | | | $ | 6.43 | | | $ | 2.86 | |
Diluted net income per share | $ | 9.26 | | | $ | 6.32 | | | $ | 2.80 | |
In the computation of diluted net income per share for fiscal years 2022, 2021 and 2020, an immaterial number of shares were excluded because the effect of their inclusion would have been antidilutive.
15. STOCK-BASED COMPENSATION
Summary of Stock Plans
2009 and 2012 Incentive Plans - TriQuint Semiconductor, Inc.
Effective upon the closing of the Business Combination, the Company assumed the TriQuint, Inc. 2009 Incentive Plan and the TriQuint, Inc. 2012 Incentive Plan (the "TriQuint Incentive Plans"), originally adopted by TriQuint. The TriQuint Incentive Plans provided for the grant of stock options, restricted stock units, stock appreciation rights and other stock or cash awards to employees, officers, directors, consultants, agents, advisors and independent contractors of TriQuint and its subsidiaries and affiliates. The options granted thereunder were required to have an exercise price per share no less than 100% of the fair market value per share on the date of grant. The terms of each
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
grant under the TriQuint Incentive Plans could not exceed ten years. No further awards can be granted under these plans.
2012 Stock Incentive Plan - Qorvo, Inc.
The Company currently grants stock options and restricted stock units to employees and directors under the 2012 Stock Incentive Plan (the "2012 Plan"), which was approved by the Company's stockholders on August 16, 2012, assumed by the Company in connection with the Business Combination and reapproved by the Company's stockholders on August 8, 2017 for purposes of Section 162(m) of the Code. Under the 2012 Plan, the Company is permitted to grant stock options and other types of equity incentive awards, such as stock appreciation rights, restricted stock awards, performance shares and performance units. The maximum number of shares issuable under the 2012 Plan may not exceed the sum of (a) 4.3 million shares, plus (b) any shares of common stock (i) remaining available for issuance as of the effective date of the 2012 Plan under the Company's prior plans and (ii) subject to an award granted under a prior plan, which awards are forfeited, canceled, terminated, expire or lapse for any reason. As of April 2, 2022, 2.6 million shares were available for issuance under the 2012 Plan. The aggregate number of shares subject to performance-based restricted stock units awarded for fiscal 2022 under the 2012 Plan was 0.1 million shares.
2013 Incentive Plan - Qorvo, Inc.
Effective upon the closing of the Business Combination, the Company assumed the TriQuint, Inc. 2013 Incentive Plan (the "2013 Incentive Plan"), originally adopted by TriQuint, allowing Qorvo to issue awards under this plan. The 2013 Incentive Plan replaces the TriQuint 2012 Incentive Plan and provides for the grant of stock options, restricted stock units, stock appreciation rights and other stock or cash awards to employees, officers, directors, consultants, agents, advisors and independent contractors of TriQuint and its subsidiaries and affiliates who were such prior to the Business Combination or who become employed by the Company or its affiliates after the closing of the Business Combination. Former employees, officers and directors of RFMD are not eligible for awards under the 2013 Incentive Plan. The options granted thereunder must have an exercise price per share no less than 100% of the fair market value per share on the date of grant. The terms of each grant under the 2013 Incentive Plan may not exceed ten years. As of April 2, 2022, 0.5 million shares were available for issuance under the 2013 Incentive Plan.
2015 Inducement Stock Plan - Qorvo, Inc.
The 2015 Inducement Stock Plan (the "2015 Inducement Plan") provides for the grant of equity awards to persons as a material inducement to become employees of the Company or its affiliates. The plan provides for the grant of stock options, restricted stock units, stock appreciation rights and other stock-based awards. The maximum number of shares issuable under the 2015 Inducement Plan may not exceed the sum of (a) 0.3 million shares, plus (b) any shares of common stock (i) remaining available for issuance as of the effective date of the 2015 Inducement Stock Plan under the TriQuint 2008 Inducement Award Plan and (ii) subject to an award granted under the TriQuint 2008 Inducement Award Plan, which awards are forfeited, canceled, terminated, expire or lapse for any reason. No awards were made under the 2015 Inducement Plan in fiscal years 2022, 2021 and 2020. As of April 2, 2022, 0.3 million shares were available for issuance under the 2015 Inducement Plan.
Employee Stock Purchase Plan - Qorvo, Inc.
Effective upon closing of the Business Combination, the Company assumed the TriQuint Employee Stock Purchase Plan ("ESPP"), which is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. All regular full-time employees of the Company (including officers) and all other employees who meet the eligibility requirements of the plan may participate in the ESPP. The ESPP provides eligible employees an opportunity to acquire the Company’s common stock at 85.0% of the lower of the closing price per share of the Company’s common stock on the first or last day of each six-month purchase period. At April 2, 2022, 3.0 million shares were available for future issuance under this plan. The Company makes no cash contributions to the ESPP, but bears the expenses of its administration. The Company issued 0.3 million shares under the ESPP in fiscal 2022, 0.4 million shares in fiscal 2021 and 0.5 million shares in fiscal 2020.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
For fiscal years 2022, 2021 and 2020, the primary stock-based awards and their general terms and conditions are as follows:
Restricted stock units granted by the Company in fiscal years 2022, 2021 and 2020 are either service-based or performance and service-based. Service-based restricted stock units generally vest over a four-year period from the grant date. Performance and service-based restricted stock units are earned based on Company performance of stated metrics during the fiscal year and, if earned, generally vest one-half when earned and the balance over two years. Restricted stock units granted to non-employee directors generally vest over a one-year period from the grant date. In fiscal 2022, each non-employee director was eligible to receive an annual grant of restricted stock units.
The options and restricted stock units granted to certain officers of the Company generally will, in the event of the officer's termination other than for cause and subject to the officer executing certain agreements in favor of the Company, continue to vest pursuant to the same vesting schedule as if the officer had remained an employee of the Company and, as a result, these awards are expensed at grant date. In fiscal 2022, stock-based compensation of $19.7 million was recognized upon the grant of 0.1 million restricted share units to certain officers of the Company.
Stock-Based Compensation
Under ASC 718, 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. ASC 718 covers a wide range of stock-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee stock purchase plans.
Total pre-tax stock-based compensation expense recognized in the Consolidated Statements of Income was $83.5 million, $89.3 million and $76.0 million, for fiscal years 2022, 2021 and 2020, respectively, net of expense capitalized into inventory.
A summary of activity with respect to stock options under the Company’s director and employee stock plans follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options (in thousands) | | Weighted- Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding as of April 3, 2021 | 458 | | $ | 17.21 | | | | | |
Granted | — | | | — | | | | | |
Exercised | (193) | | $ | 18.57 | | | | | |
Canceled | (7) | | $ | 35.37 | | | | | |
Forfeited | — | | | — | | | | | |
Outstanding as of April 2, 2022 | 258 | | $ | 15.67 | | | 1.04 | | $ | 27,270 | |
Vested and expected to vest as of April 2, 2022 | 258 | | $ | 15.67 | | | 1.04 | | $ | 27,270 | |
Options exercisable as of April 2, 2022 | 258 | | $ | 15.67 | | | 1.04 | | $ | 27,270 | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based upon the Company’s closing stock price of $121.51 as of April 1, 2022 (the last Nasdaq trading day prior to the fiscal year end on April 2, 2022), that would have been received by the option holders had all option holders with in-the-money options exercised their options as of that date. As of April 2, 2022, there was no remaining unearned compensation cost related to unvested option awards.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing model based on the expected volatility, dividend yield, term and risk-free interest rate. There were no options granted during fiscal years 2022, 2021 and 2020.
The total intrinsic value of options exercised during fiscal years 2022, 2021 and 2020 was $27.1 million, $66.7 million and $65.1 million, respectively.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Cash received from the exercise of stock options and from participation in the employee stock purchase plan (excluding accrued unremitted employee funds) was approximately $36.9 million for fiscal 2022 and is reflected in cash flows from financing activities in the Consolidated Statement of Cash Flows. The Company settles employee stock options with newly issued shares of the Company's common stock.
ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based upon historical pre-vesting forfeiture experience, the Company assumed an annualized forfeiture rate of 1.4% for both stock options and restricted stock units.
A summary of activity with respect to restricted stock unit awards ("RSUs") under the Company’s director and employee stock plans follows:
| | | | | | | | | | | |
|
RSUs (in thousands) | | Weighted-Average Grant-Date Fair Value |
Balance at April 3, 2021 | 1,859 | | | $ | 93.22 | |
Granted | 670 | | | 185.26 | |
Vested | (874) | | 87.78 | |
Forfeited | (116) | | 124.95 | |
Balance at April 2, 2022 | 1,539 | | | $ | 126.46 | |
As of April 2, 2022, total remaining unearned compensation cost related to unvested restricted stock units was $121.0 million, which will be amortized over the weighted-average remaining service period of approximately 1.2 years.
The total intrinsic value of restricted stock units that vested during fiscal years 2022, 2021 and 2020 was $163.6 million, $121.8 million and $67.7 million, respectively, based upon the fair market value of the Company’s common stock on the vesting date.
16. STOCKHOLDERS’ EQUITY
Stock Repurchase
On October 31, 2019, the Company announced that its Board of Directors authorized a share repurchase program to repurchase up to $1.0 billion of the Company's outstanding common stock, which included approximately $117.0 million authorized under a prior program which was terminated concurrent with this authorization. On May 5, 2021, the Company announced that its Board of Directors authorized a new share repurchase program to repurchase up to $2.0 billion of the Company's outstanding common stock, which included approximately $236.9 million authorized under the program announced on October 31, 2019, which was terminated concurrent with the new authorization. As of April 2, 2022, there was $861.7 million of availability under the share repurchase program.
Under the Company's 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 the Company repurchases its 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 the Company 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.
The Company repurchased 7.3 million shares, 3.6 million shares and 6.4 million shares of its 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.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Common Stock Reserved For Future Issuance
At April 2, 2022, the Company had reserved a total of approximately 8.2 million of its authorized 405.0 million shares of common stock for future issuance as follows (in thousands):
| | | | | |
Outstanding stock options under formal directors’ and employees’ stock option plans | 258 |
Possible future issuance under Company stock incentive plans | 3,424 |
Employee stock purchase plan | 2,984 |
Restricted stock-based units outstanding | 1,539 |
Total shares reserved | 8,205 |
17. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
The Company's operating and reportable segments as of April 2, 2022 are MP and IDP based on the organizational structure and information reviewed by the Company's Chief Executive Officer, who is the Company's chief operating decision maker ("CODM"), and these segments are managed separately based on the end markets and applications they support. The CODM allocates resources and assesses the performance of each operating segment primarily based on operating income.
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, system-on-a-chip and power management solutions for a wide range of markets, including cellular and IT infrastructure, automotive, renewable energy, defense and IoT.
The "All other" category includes operating expenses such as stock-based compensation expense, amortization of intangible assets, acquisition and integration related costs, restructuring related charges, goodwill impairment, fixed asset impairments, (loss) gain on sale of fixed assets, start-up costs and other miscellaneous corporate overhead expenses that the Company does not allocate to its operating segments because these expenses are not included in the segment operating performance measures evaluated by the Company’s CODM. The Company’s operating segments do not record intercompany revenue. The Company does not allocate gains and losses from investments, interest and other income (expense) or taxes to operating segments. The CODM does not evaluate operating segments using discrete asset information. Except as discussed above regarding the "All other" category, the Company’s accounting policies for segment reporting are the same as for the Company as a whole.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following tables present details of the Company’s operating and reportable segments and a reconciliation of the "All other" category (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
Revenue: | | | | | |
MP | $ | 3,545,253 | | | $ | 2,856,813 | | | $ | 2,397,740 | |
IDP | 1,100,461 | | | 1,158,494 | | | 841,401 | |
Total revenue | $ | 4,645,714 | | | $ | 4,015,307 | | | $ | 3,239,141 | |
Operating income (loss): | | | | | |
MP | $ | 1,290,132 | | | $ | 1,008,171 | | | $ | 715,514 | |
IDP | 261,511 | | | 283,507 | | | 145,295 | |
All other | (325,574) | | | (385,051) | | | (437,593) | |
Operating income | 1,226,069 | | | 906,627 | | | 423,216 | |
Interest expense | (63,326) | | | (75,198) | | | (60,392) | |
Other income (expense), net | 18,341 | | | (24,049) | | | 32,265 | |
Income before income taxes | $ | 1,181,084 | | | $ | 807,380 | | | $ | 395,089 | |
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
Reconciliation of "All other" category: | | | | | |
Stock-based compensation expense | $ | (83,507) | | | $ | (89,322) | | | $ | (75,978) | |
Amortization of intangible assets | (150,128) | | | (252,137) | | | (246,563) | |
Acquisition and integration related costs | (27,964) | | | (32,946) | | | (61,891) | |
Restructuring related charges | (2,121) | | | (2,722) | | | (47,869) | |
Goodwill impairment | (48,000) | | | — | | | — | |
Other (1) | (13,854) | | | (7,924) | | | (5,292) | |
Loss from operations for "All other" | $ | (325,574) | | | $ | (385,051) | | | $ | (437,593) | |
(1) Other includes fixed asset impairments, (loss) gain on sale of fixed assets, start-up costs and other miscellaneous corporate overhead expenses.
The consolidated financial statements include revenue to customers by geographic region (based on the location of the customers' headquarters) that are summarized as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
Revenue: | | | | | |
United States | $ | 1,928,403 | | | $ | 1,631,110 | | | $ | 1,468,358 | |
China | 1,499,212 | | | 1,579,017 | | | 1,106,679 | |
Other Asia | 620,620 | | | 363,523 | | | 340,400 | |
Taiwan | 345,869 | | | 248,708 | | | 169,337 | |
Europe | 251,610 | | | 192,949 | | | 154,367 | |
Total Revenue | $ | 4,645,714 | | | $ | 4,015,307 | | | $ | 3,239,141 | |
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The consolidated financial statements include the following long-lived tangible asset amounts related to operations of the Company by geographic region (in thousands):
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| April 2, 2022 | | April 3, 2021 |
Long-lived tangible assets: | | | |
United States | $ | 1,007,463 | | | $ | 1,011,686 | |
China | 192,416 | | 200,346 |
Other countries | 53,712 | | 53,999 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Qorvo, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Qorvo, Inc. and subsidiaries (the Company) as of April 2, 2022 and April 3, 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended April 2, 2022, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 2, 2022 and April 3, 2021, and the results of its operations and its cash flows for each of the three years in the period ended April 2, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of April 2, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated May 20, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Inventory - Valuation
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Description of the Matter | The Company’s inventory, net totaled $755.7 million as of April 2, 2022, representing approximately 10% of total assets. As explained in Note 1 to the consolidated financial statements, the Company assesses the valuation of all inventories including manufacturing raw materials, work-in-process, and finished goods each reporting period. Obsolete inventory or inventory in excess of management’s estimated demand forecasts is written down to its estimated net realizable value if less than cost by recording an inventory reserve at each reporting period.
Auditing management’s estimates for inventory reserves involved subjective auditor judgment because the assessment considers a number of factors, including estimated customer demand forecasts, technological obsolescence risks, and possible alternative uses that are affected at least partially by market and economic conditions outside the Company’s control. |
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How We Addressed the Matter in Our Audit
| We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s inventory reserve process. This included testing controls over management's review of the assumptions and data underlying the inventory reserves, such as demand forecasts and consideration of how factors outside of the Company’s control might affect the valuation of obsolete and excess inventory.
Our audit procedures included, among others, evaluating the significant assumptions (e.g., customer demand forecasts, technological and/or market obsolescence, and possible alternative uses) and the accuracy and completeness of underlying data used in management’s assessment of inventory reserves. We evaluated inventory levels compared to forecasted demand, historical sales and specific product considerations. We also assessed the historical accuracy of management’s estimates for both the forecast assumptions and the reserve estimate. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2018.
Raleigh, North Carolina
May 20, 2022
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Qorvo, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Qorvo, Inc. and subsidiaries’ internal control over financial reporting as of April 2, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Qorvo, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of April 2, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of April 2, 2022 and April 3, 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended April 2, 2022, and the related notes and our report dated May 20, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Raleigh, North Carolina
May 20, 2022