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 three reportable operating segments: HPA, CSG and ACG. HPA is a leading global supplier of RF and power solutions for automotive, defense and aerospace, cellular infrastructure, broadband and other markets. CSG is a leading global supplier of connectivity and sensor solutions, with broad expertise spanning UWB, Matter®, Bluetooth® Low Energy, Zigbee®, Thread®, Wi-Fi®, cellular IoT, and MEMS-/BAW-based sensors. ACG is a leading global supplier of cellular RF solutions for smartphones, wearables, laptops, tablets and other devices.
The COVID-19 pandemic has continued to impact the semiconductor industry supply chain, causing uncertainty in customer demand, worldwide economies and financial markets. During fiscal 2023, we experienced unexpectedly weakened demand for 5G handsets in China and EMEA due to unprecedented disruption resulting, in part, from measures taken in China to control the COVID-19 pandemic and the war in Ukraine. As a result, we did not meet the minimum purchase commitments under a long-term capacity reservation agreement with a foundry supplier. In fiscal 2023, the purchase shortfall resulted in an impairment to the prepaid refundable deposit of $130.0 million, and we recorded additional reserves of approximately $20.0 million for inventory in excess of demand forecasts. Additionally, we assessed the future minimum purchase commitments over the remaining term of the agreement and recorded an estimated shortfall liability of $31.0 million. These transactions resulted in a total increase to cost of goods sold of $181.0 million in fiscal 2023.
As part of our ongoing efforts to focus on growth drivers and key markets and to streamline operations, in the fourth quarter of fiscal 2023, we began to seek strategic alternatives related to our non-core biotechnology business. Given the future funding requirements necessary to further develop its diagnostic testing solutions and achieve our desired results, we decided not to invest further in this business. Therefore, we determined that there was a more-likely-than-not expectation of selling or disposing of all, or a portion, of this reporting unit. An evaluation of the asset group within this reporting unit was performed which resulted in total restructuring charges of approximately $94.0 million. These charges included impairment of equipment and inventory of approximately $74.8 million, other charges of approximately $6.8 million, and a goodwill impairment charge of approximately $12.4 million.
Fiscal 2023 Financial Highlights
•Revenue decreased 23.2% in fiscal 2023 to $3,569.4 million, compared to $4,645.7 million in fiscal 2022, primarily due to ongoing global macroeconomic challenges (including measures taken in China to control the COVID-19 pandemic, the war in Ukraine and the negative impact of higher inflation) which resulted in lower demand for 5G handsets and other products, such as Wi-Fi components, power management and base station. Demand was also negatively impacted by ongoing efforts to consume channel inventories.
•Gross margin for fiscal 2023 was 36.3%, compared to 49.2% in fiscal 2022, primarily due to charges associated with a long-term capacity reservation agreement and factory underutilization resulting from lower production levels.
•Operating income was $183.2 million in fiscal 2023, compared to $1,226.1 million in fiscal 2022. This decrease was primarily due to lower revenue and lower gross margin, as well as higher operating expenses. Operating expenses increased primarily due to restructuring charges and headcount-related expenses (including stock-based compensation), partially offset by lower incentive-based compensation.
•Net income per diluted share was $1.00 for fiscal 2023, compared to net income per diluted share of $9.26 for fiscal 2022.
•Cash flows from operations was $843.2 million for fiscal 2023, compared to $1,049.2 million for fiscal 2022. This year-over-year decrease was primarily due to decreased profitability and changes in working capital.
•Capital expenditures were $159.0 million in fiscal 2023, compared to $213.5 million in fiscal 2022.
•We repurchased approximately 8.7 million shares of our common stock for approximately $862.2 million.
RESULTS OF OPERATIONS
Consolidated
The table below presents a summary of our results of operations for fiscal years 2023 and 2022 along with a year-over-year comparison. Refer to 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 2, 2022, filed with the SEC on May 20, 2022, which is incorporated by reference herein, for a summary of our results of operations for the fiscal year ended April 3, 2021 along with a year-over-year comparison between fiscal years 2022 and 2021.
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| Fiscal 2023 | | Fiscal 2022 | | Increase (Decrease) |
(In thousands, except percentages) | Dollars | | % of Revenue | | Dollars | | % of Revenue | | Dollars | | Percentage Change |
Revenue | $ | 3,569,399 | | | 100.0 | % | | $ | 4,645,714 | | | 100.0 | % | | $ | (1,076,315) | | | (23.2) | % |
Cost of goods sold | 2,272,457 | | | 63.7 | | | 2,359,546 | | | 50.8 | | | (87,089) | | | (3.7) | |
Gross profit | 1,296,942 | | | 36.3 | | | 2,286,168 | | | 49.2 | | | (989,226) | | | (43.3) | |
Research and development | 649,841 | | | 18.2 | | | 623,636 | | | 13.4 | | | 26,205 | | | 4.2 | |
Selling, general and administrative | 358,790 | | | 10.1 | | | 349,718 | | | 7.5 | | | 9,072 | | | 2.6 | |
Other operating expense | 105,143 | | | 2.9 | | | 86,745 | | | 1.9 | | | 18,398 | | | 21.2 | |
Operating income | $ | 183,168 | | | 5.1 | % | | $ | 1,226,069 | | | 26.4 | % | | $ | (1,042,901) | | | (85.1) | % |
Revenue
Revenue decreased primarily due to ongoing global macroeconomic challenges (including measures taken in China to control the COVID-19 pandemic, the war in Ukraine and the negative impact of higher inflation) which resulted in lower demand for 5G handsets and other products, such as Wi-Fi components, power management and base station. Demand was also negatively impacted by ongoing efforts to consume channel inventories. The decreased revenue was partially offset by higher demand for our defense products and incremental revenue from SiC-based power products resulting from the acquisition of United Silicon Carbide, Inc. ("United SiC").
We provide products to our largest end customer (Apple) through sales to multiple contract manufacturers, which in the aggregate accounted for approximately 37% and 33% of total revenue in fiscal years 2023 and 2022, respectively. Samsung accounted for approximately 12% and 11% of total revenue in fiscal years 2023 and 2022, respectively. These customers primarily purchase RF solutions for a variety of mobile devices.
International shipments amounted to $1,751.4 million in fiscal 2023 (approximately 49% of revenue) compared to $2,717.3 million in fiscal 2022 (approximately 58% of revenue). Shipments to Asia totaled $1,549.0 million in fiscal 2023 (approximately 43% of revenue) compared to $2,465.7 million in fiscal 2022 (approximately 53% of revenue).
Gross Margin
Gross margin decreased primarily due to charges associated with a long-term capacity reservation agreement, factory underutilization resulting from lower production levels, inventory charges related to demand fluctuations and supplier quality issues. These decreases to gross margin were partially offset by favorable changes in product mix.
Operating Expenses
Research and Development
R&D spending increased primarily due to headcount-related expenses, including stock-based compensation, as a result of our increased investment in developing new technologies and products. These increases were partially offset by lower incentive-based compensation.
Selling, General and Administrative
Selling, general and administrative expense increased primarily due to headcount-related expenses, including stock-based compensation. These increases were partially offset by lower incentive-based compensation.
Other Operating Expense
Other operating expense increased primarily due to restructuring related charges associated with our non-core biotechnology business. Refer to Note 12 of the Notes to Consolidated Financial Statements for additional information.
Operating Segments
High Performance Analog
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| | Fiscal Year | | Increase (Decrease) |
(In thousands, except percentages) | | 2023 | | 2022 | | Dollars | | Percentage Change |
Revenue | | $ | 727,187 | | | $ | 707,395 | | | $ | 19,792 | | | 2.8 | % |
Operating income | | 198,820 | | | 210,441 | | | (11,621) | | | (5.5) | |
Operating income as a % of revenue | | 27.3 | % | | 29.7 | % | | | | |
HPA revenue increased primarily due to higher demand for our defense products and incremental revenue from our SiC-based power products resulting from the acquisition of United SiC. These increases were partially offset by a decrease in demand for power management products supporting solid-state drives and power tools and base station products, driven by ongoing efforts to consume channel inventories.
HPA operating income decreased primarily due to effects from factory underutilization. Operating expenses increased primarily as a result of the addition of United SiC expenses, partially offset by lower incentive-based compensation.
Connectivity and Sensors Group
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| | Fiscal Year | | Decrease |
(In thousands, except percentages) | | 2023 | | 2022 | | Dollars | | Percentage Change |
Revenue | | $ | 474,364 | | | $ | 703,881 | | | $ | (229,517) | | | (32.6) | % |
Operating (loss) income | | (72,080) | | | 107,814 | | | (179,894) | | | (166.9) | |
Operating (loss) income as a % of revenue | | (15.2) | % | | 15.3 | % | | | | |
CSG revenue decreased primarily due to a decrease in end market demand for Wi-Fi components, in addition to ongoing efforts to consume channel inventories.
CSG operating income decreased primarily due to lower revenue, factory underutilization and higher inventory charges. Operating expenses increased primarily due to headcount-related expenses as a result of our increased investment in developing new technologies and products.
Advanced Cellular Group
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| | Fiscal Year | | Decrease |
(In thousands, except percentages) | | 2023 | | 2022 | | Dollars | | Percentage Change |
Revenue | | $ | 2,367,848 | | | $ | 3,234,438 | | | $ | (866,590) | | | (26.8) | % |
Operating income | | 627,708 | | | 1,233,388 | | | (605,680) | | | (49.1) | |
Operating income as a % of revenue | | 26.5 | % | | 38.1 | % | | | | |
ACG revenue decreased primarily due to ongoing global macroeconomic challenges (including measures taken in China to control the COVID-19 pandemic, the war in Ukraine and the negative impact of higher inflation) which resulted in lower demand for 5G handsets. Demand for ACG products was also negatively impacted by ongoing efforts to consume channel inventories.
ACG operating income decreased primarily due to lower revenue, factory underutilization resulting from lower production levels, as well as inventory charges related to demand fluctuations and supplier quality issues. Operating expenses increased primarily due to headcount-related expenses as a result of increased investment in developing new technologies and products. These decreases to operating income were partially offset by favorable changes in product mix.
Refer to Note 17 of the Notes to Consolidated Financial Statements for a reconciliation of segment operating income to the consolidated operating income for fiscal years 2023, 2022 and 2021.
INTEREST, OTHER INCOME AND INCOME TAXES
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| | Fiscal Year | | |
(In thousands) | | 2023 | | 2022 | | | | |
Interest expense | | $ | (68,463) | | | $ | (63,326) | | | | | |
Other income, net | | 9,924 | | | 18,341 | | | | | |
Income tax expense | | (21,477) | | | (147,731) | | | | | |
Interest expense
During fiscal 2023, we recorded interest expense primarily related to the 4.375% senior notes due 2029 (the "2029 Notes"), the 3.375% senior notes due 2031 (the "2031 Notes"), and the 1.750% senior notes due 2024 (the "2024 Notes"). During fiscal 2022, we recorded interest expense primarily related to the 2029 Notes and the 2031 Notes. Interest expense in the preceding table for fiscal years 2023 and 2022 is net of capitalized interest of $3.9 million and $3.7 million, respectively.
Other income, net
During fiscal 2023, we recorded interest income of $21.1 million, losses of $4.2 million based on our share of the earnings from our limited partnership investments, and impairments and losses of $7.8 million from other investments.
During fiscal 2022, we recorded income of $12.0 million based on our share of the earnings from our limited partnership investments, net gains of $2.7 million from other investments, and interest income of $2.7 million.
Income tax expense
Income tax expense for fiscal 2023 was $21.5 million, which was primarily comprised of tax expense related to international operations generating pre-tax book income and the impact of the Tax Act's GILTI provisions (including the effects of the capitalization and amortization of research and development expenses which were previously expensed for U.S. tax purposes), offset by a tax benefit related to domestic and international operations generating pre-tax book losses and domestic tax credits. This resulted in an annual effective tax rate of 17.2% for fiscal 2023.
Income tax expense for fiscal 2022 was $147.7 million, which 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. This resulted in an annual effective tax rate of 12.5% for fiscal 2022.
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 2023 and 2022, the valuation allowance against domestic and foreign deferred tax assets was $35.9 million and $36.3 million, respectively.
Refer to 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 1, 2023, total remaining unearned compensation cost related to unvested restricted stock units was $137.6 million, which will be amortized over the weighted-average remaining service period of approximately 1.3 years.
Refer to Note 15 of the Notes to Consolidated Financial Statements for additional information regarding stock-based compensation.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operations is our primary source of liquidity. As of April 1, 2023, we had working capital of approximately $1,474.0 million, including $808.8 million in cash and cash equivalents, compared to working capital of approximately $1,774.7 million, including $972.6 million in cash and cash equivalents, as of April 2, 2022.
Our $808.8 million of total cash and cash equivalents as of April 1, 2023, includes $554.7 million held by our foreign subsidiaries, of which $365.6 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 "Credit Agreement") with Bank of America, N.A., acting as administrative agent, and a syndicate of lenders. The Credit Agreement amended and restated the previous credit agreement dated as of December 5, 2017. The Credit Agreement includes a senior revolving line of credit (the "Revolving Facility") of up to $300.0 million, and included a senior term loan, that was fully repaid in fiscal 2022. The Revolving Facility is available to finance working capital, capital expenditures and other general corporate purposes.
Pursuant to the 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 years 2023 and 2022, there were no borrowings under the Revolving Facility.
The 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 1, 2023, we were in compliance with these covenants. Refer to Note 9 of the Notes to Consolidated Financial Statements for further information about the Credit Agreement, including applicable interest rates.
Stock Repurchases
On November 2, 2022, 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 the remaining authorized dollar amount under a prior program terminated concurrent with the new authorization. Under the current program, share 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 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.
During fiscal years 2023, 2022 and 2021, we repurchased approximately 8.7 million shares, 7.3 million shares and 3.6 million shares of our common stock for approximately $862.2 million, $1,152.3 million and $515.1 million, respectively (including transaction costs and excise tax, as applicable) under the prior and current share repurchase programs. As of April 1, 2023, approximately $1,705.0 million remains available for repurchases under the current share repurchase program. Refer to Note 16 of the Notes to Consolidated Financial Statements for further discussion of our share repurchase program.
Cash Flows from Operating Activities
Operating activities in fiscal 2023 generated cash of $843.2 million, compared to $1,049.2 million in fiscal 2022. This decrease in cash provided by operating activities was primarily due to decreased profitability, partially offset by changes in working capital. In fiscal 2022, cash provided by operating activities was impacted by an increase in prepaid expenses primarily due to prepayments of certain fees and deposits associated with a long-term capacity reservation agreement.
Cash Flows from Investing Activities
Net cash used in investing activities in fiscal 2023 was $153.4 million, compared to $596.0 million in fiscal 2022. We did not acquire any businesses in fiscal 2023, while in fiscal 2022 we completed the acquisitions of NextInput, Inc. and United SiC which resulted in net cash outflows of $389.1 million. In addition, our cash outflows for capital expenditures decreased in fiscal 2023.
Cash Flows from Financing Activities
Net cash used in financing activities in fiscal 2023 was $853.4 million, compared to $875.5 million in fiscal 2022. We did not record any significant debt activity in fiscal 2023, while in fiscal 2022 we received proceeds of $499.1 million from the issuance of the 2024 Notes and repaid a term loan balance of $197.5 million. In addition, less cash was used for stock repurchases in fiscal 2023.
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 availability from our Revolving Facility and term loans, 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 1, 2023, 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 | | 2024 | | 2025-2026 | | 2027-2028 | | 2029 and thereafter |
Capital commitments (1) | $ | 79,987 | | | $ | 63,003 | | | $ | 16,984 | | | $ | — | | | $ | — | |
Purchase obligations (2) | 1,203,691 | | | 594,114 | | | 567,094 | | | 42,483 | | | — | |
Leases | 102,162 | | | 22,408 | | | 33,258 | | | 24,091 | | | 22,405 | |
Long-term debt obligations (3) | 2,516,813 | | | 57,750 | | | 630,375 | | | 133,438 | | | 1,695,250 | |
Total | $ | 3,902,653 | | | $ | 737,275 | | | $ | 1,247,711 | | | $ | 200,012 | | | $ | 1,717,655 | |
(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 1, 2023.
(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 1, 2023. Refer to 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 1, 2023. Debt obligations are classified based on their stated maturity date, and any future redemptions would impact our cash payments. Refer to Note 9 of the Notes to Consolidated Financial Statements for further information.
Other Contractual Obligations
As of April 1, 2023, in addition to the amounts shown in the contractual obligations table above, we have $21.0 million of unrecognized income tax benefits and accrued interest and penalties which have 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 $4.8 million is to be paid over the next three 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 $9.4 million as of April 1, 2023. 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 2023 and are expected to be approximately $0.4 million in fiscal 2024.
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 1, 2023 was $40.7 million, of which $1.6 million is estimated to be paid in fiscal 2024. Refer to 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 1, 2023 | | April 2, 2022 |
ASSETS | | | |
Current assets (1) | $ | 972,989 | | | $ | 771,528 | |
Non-current assets | 2,398,287 | | | 2,624,454 | |
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LIABILITIES | | | |
Current liabilities | $ | 296,049 | | | $ | 241,674 | |
Long-term liabilities (2) | 2,689,824 | | | 2,634,501 | |
(1) Includes net amounts due from Non-Guarantor subsidiaries of $379.5 million and $286.8 million as of April 1, 2023 and April 2, 2022, respectively.
(2) Includes net amounts due to Non-Guarantor subsidiaries of $509.1 million and $433.5 million as of April 1, 2023 and April 2, 2022, respectively.
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Summarized Statement of Income (in thousands) | | Fiscal 2023 |
Revenue | | $ | 889,727 | |
Gross profit | | (54,576) | |
Net loss | | (372,643) | |
CRITICAL ACCOUNTING 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. Refer to 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.
These valuations and estimates require significant judgment. If actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could materially adversely impact our consolidated financial position and results of operations.
Historically, inventory reserves have fluctuated as new technologies have been introduced and customers’ demand has shifted.
Refer to Note 3 of the Notes to Consolidated Financial Statements for additional information regarding our inventories.
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. If actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could materially adversely impact our consolidated financial position and results of operations.
Refer to Note 4 of the Notes to Consolidated Financial Statements for additional information regarding our property and equipment.
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 significant 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 recorded to the income statement.
Refer to Note 5 of the Notes to Consolidated Financial Statements for additional information regarding our business acquisitions.
Goodwill Impairment Testing. 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 the carrying amount of the goodwill may not be recovered. Under ASC 350, "Intangibles - Goodwill and Other," we have the option to first assess qualitatively whether it is more likely than not the fair value of a reporting unit is less than its carrying amount, including goodwill. If qualitative assessments conclude it is more likely than not the fair value of any reporting unit is less than its carrying value, quantitative assessments are performed on the applicable reporting units. Inherent in the fair value determinations 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.
During the second quarter of fiscal 2023, we updated our organizational structure to more closely align similar technologies and applications with customers and end markets (the "Reorganization"). Refer to Note 17 of the Notes to Consolidated Financial Statements for additional information regarding our new organizational structure. Prior to the Reorganization ("Pre-Reorganization"), we operated under two segments with a total of five reporting units and subsequent to the Reorganization ("Post-Reorganization") we are operating under three segments with a total of eight reporting units. In accordance with ASC 350, we performed quantitative impairment assessments on each reporting unit immediately before and after the change in organizational structure.
Our quantitative assessments considered the income approach and the market approach to estimate each reporting unit’s fair value. Under the income approach, the fair value of each reporting unit is based on the present value of estimated future cash flows. Cash flow projections are based on our estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used to determine the present value of future cash flows is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with similar operating and investment characteristics. The resulting fair value, based on the income and market approaches, is then compared to the carrying value to determine if impairment is necessary.
Based on the Pre-Reorganization quantitative assessment performed on July 2, 2022, management concluded there was no goodwill impairment. Based on the Post-Reorganization quantitative analysis performed on July 3, 2022 (the "Quantitative Analysis"), it was determined the fair value of five of our eight reporting units significantly exceeded their carrying values. Therefore, for our annual goodwill impairment assessment that was performed as of January 1, 2023, we opted to perform a qualitative impairment assessment for the goodwill related to these five reporting units. We concluded based on the relevant facts and circumstances, including the Quantitative Analysis performed, it was more likely than not that the fair value of each of these reporting units exceeded their related carrying value and no further impairment testing was required. In addition, based on the Quantitative Analysis, it was determined the fair value of three of our eight reporting units did not significantly exceed their carrying values. Therefore, we performed additional quantitative analyses on two of these reporting units as part of our qualitative analysis and concluded that based on the relevant facts and circumstances, it was more likely than not that the fair value of each of these reporting units exceeded their related carrying value and no further impairment testing was required.
As part of our ongoing efforts to focus on growth drivers and key markets and to streamline operations, in the fourth quarter of fiscal 2023, we began to seek strategic alternatives for the third reporting unit (our non-core biotechnology business). Given the future funding requirements necessary to further develop its diagnostic testing solutions and achieve our desired results, we decided not to invest further in this business. Therefore, we determined that there was a more-likely-than-not expectation of selling or disposing of all, or a portion, of this reporting unit. Based on these facts and circumstances, we determined that the carrying value exceeded the fair value of this reporting unit which resulted in a goodwill impairment charge of approximately $12.4 million (representing the entire goodwill assigned to this reporting unit), which is recorded in "Other operating expense" in the Consolidated Statement of Income for the fiscal year ended April 1, 2023.
In fiscal 2022 (based on the Pre-Reorganization structure), 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 reporting units a quantitative assessment was performed which resulted in a goodwill impairment charge of approximately $48.0 million, which is recorded in "Other operating expense" in the Consolidated Statement of Income.
Refer to Note 6 of the Notes to Consolidated Financial Statements for additional information regarding our goodwill and intangible assets.
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. Upon completion of development, in-process research and 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 research and development ("R&D").
We evaluate definite-lived intangible assets for impairment to determine whether facts and circumstances 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. When measuring impairment, we make significant assumptions and apply judgment in estimating future cash flows and asset fair values, including annual revenue growth rates and a terminal year growth rate that reflects the inherent risk in future cash flows. If actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could materially adversely impact our consolidated financial position and results of operations.
No definite-lived intangible asset impairment charges were recorded in fiscal years 2023 or 2022.
Refer to Note 6 of the Notes to Consolidated Financial Statements for additional information regarding our identified intangible assets.
Purchase Obligations. We evaluate material purchase obligations each reporting period to assess whether our contractual commitments exceed our current and long-term forecast. These evaluations include consideration of customer forecasts, legal obligations, macroeconomic and geopolitical factors as well as market and industry trends.
In fiscal 2022, we entered into a long-term capacity reservation agreement with a foundry supplier (which was later amended in fiscal 2023) that requires us to purchase, and the foundry supplier to supply, a certain number of wafers through calendar year 2026. In connection with this agreement, we paid an upfront refundable deposit, and if the purchase commitments per the agreement were not met, under certain circumstances the supplier could deduct the amount of purchase shortfall amounts from the prepaid refundable deposit at the end of each calendar year.
We experienced unexpectedly weakened demand in fiscal 2023 and did not meet the minimum purchase commitments under the amended long-term capacity reservation agreement, which resulted in impairments to the prepaid refundable deposit, additional inventory reserves for inventory in excess of demand forecasts, and a liability for the estimated purchase commitment shortfall over the remaining term of the agreement.
To the extent that our assumptions pertaining to anticipated future demand are incorrect or there are further declines in customer forecasts, additional charges may be recorded in future periods, which would have a negative impact on our gross margin and other operating results.
Refer to Note 11 of the Notes to Consolidated Financial Statements for additional information regarding our purchase obligations.
Revenue Recognition. 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.
We apply a five-step approach 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.
Our revenue recognition accounting methodology contains uncertainties because it requires us to make significant estimates and assumptions, and to apply judgment. For example, for arrangements that have multiple performance obligations, we must exercise judgment and use estimates in order to (1) determine whether performance obligations are distinct and should be accounted for separately; (2) determine the stand-alone selling price of each performance obligation; (3) allocate the transaction price among the various performance obligations on a relative standalone selling price basis; and (4) determine whether revenue for each performance obligation should be recognized at a point in time or over time.
If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of revenue or deferred revenue that we report in a particular period.
Refer to Note 1 of the Notes to Consolidated Financial Statements for a complete discussion of our revenue recognition policies.
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. Refer to 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.
Refer to 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 1, 2023 | | April 2, 2022 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 808,757 | | | $ | 972,592 | |
Accounts receivable, net of allowance of $369 and $402 as of April 1, 2023 and April 2, 2022, respectively | 304,519 | | | 568,850 | |
Inventories | 796,596 | | | 755,748 | |
Prepaid expenses | 46,684 | | | 49,839 | |
Other receivables | 26,535 | | | 32,151 | |
Other current assets | 46,703 | | | 70,685 | |
Total current assets | 2,029,794 | | | 2,449,865 | |
Property and equipment, net | 1,149,806 | | | 1,253,591 | |
Goodwill | 2,760,813 | | | 2,775,634 | |
Intangible assets, net | 537,703 | | | 674,786 | |
Long-term investments | 20,406 | | | 31,086 | |
Other non-current assets | 193,381 | | | 324,110 | |
Total assets | $ | 6,691,903 | | | $ | 7,509,072 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 210,701 | | | $ | 327,915 | |
Accrued liabilities | 222,463 | | | 240,186 | |
Other current liabilities | 122,599 | | | 107,026 | |
Total current liabilities | 555,763 | | | 675,127 | |
Long-term debt | 2,048,073 | | | 2,047,098 | |
Other long-term liabilities | 185,273 | | | 233,629 | |
Total liabilities | 2,789,109 | | | 2,955,854 | |
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; 98,649 and 106,303 shares issued and outstanding at April 1, 2023 and April 2, 2022, respectively | 3,821,474 | | | 4,035,849 | |
Accumulated other comprehensive (loss) income | (3,175) | | | 5,232 | |
Retained earnings | 84,495 | | | 512,137 | |
Total stockholders’ equity | 3,902,794 | | | 4,553,218 | |
Total liabilities and stockholders’ equity | $ | 6,691,903 | | | $ | 7,509,072 | |
See accompanying notes.
Qorvo, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2023 | | 2022 | | 2021 |
| | | | | |
Revenue | $ | 3,569,399 | | | $ | 4,645,714 | | | $ | 4,015,307 | |
Cost of goods sold | 2,272,457 | | | 2,359,546 | | | 2,131,741 | |
Gross profit | 1,296,942 | | | 2,286,168 | | | 1,883,566 | |
| | | | | |
Operating expenses: | | | | | |
Research and development | 649,841 | | | 623,636 | | | 570,395 | |
Selling, general and administrative | 358,790 | | | 349,718 | | | 367,238 | |
Other operating expense | 105,143 | | | 86,745 | | | 39,306 | |
Total operating expenses | 1,113,774 | | | 1,060,099 | | | 976,939 | |
Operating income | 183,168 | | | 1,226,069 | | | 906,627 | |
| | | | | |
Interest expense | (68,463) | | | (63,326) | | | (75,198) | |
Other income (expense), net | 9,924 | | | 18,341 | | | (24,049) | |
Income before income taxes | 124,629 | | | 1,181,084 | | | 807,380 | |
| | | | | |
Income tax expense | (21,477) | | | (147,731) | | | (73,769) | |
Net income | $ | 103,152 | | | $ | 1,033,353 | | | $ | 733,611 | |
| | | | | |
Net income per share: | | | | | |
Basic | $ | 1.01 | | | $ | 9.38 | | | $ | 6.43 | |
Diluted | $ | 1.00 | | | $ | 9.26 | | | $ | 6.32 | |
| | | | | |
Weighted-average shares of common stock outstanding: | | | | | |
Basic | 102,206 | | | 110,196 | | | 114,034 | |
Diluted | 103,019 | | | 111,546 | | | 116,016 | |
See accompanying notes.
Qorvo, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands)
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2023 | | 2022 | | 2021 |
Net income | $ | 103,152 | | | $ | 1,033,353 | | | $ | 733,611 | |
Other comprehensive (loss) income, net of tax: | | | | | |
Change in pension liability | 1,836 | | | 857 | | | (597) | |
Foreign currency translation adjustment, including intra-entity foreign currency transactions that are of a long-term investment nature | (10,254) | | | (25,033) | | | 27,859 | |
Reclassification adjustments, net of tax: | | | | | |
Foreign currency (gain) loss realized upon liquidation of subsidiary | (25) | | | (359) | | | 16 | |
Amortization of pension actuarial loss | 36 | | | 118 | | | 83 | |
Other comprehensive (loss) income | (8,407) | | | (24,417) | | | 27,361 | |
Total comprehensive income | $ | 94,745 | | | $ | 1,008,936 | | | $ | 760,972 | |
See accompanying notes.
Qorvo, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Accumulated Other Comprehensive (Loss) Income | | Retained Earnings | | |
| Common Stock | | | | |
| Shares | | Amount | | | | Total |
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 | |
Net income | — | | | — | | | — | | | 103,152 | | | 103,152 | |
Other comprehensive loss | — | | | — | | | (8,407) | | | — | | | (8,407) | |
Exercise of stock options and vesting of restricted stock units, net of shares withheld for employee taxes | 665 | | | (20,847) | | | — | | | — | | | (20,847) | |
Issuance of common stock in connection with employee stock purchase plan | 345 | | | 30,169 | | | — | | | — | | | 30,169 | |
Repurchase of common stock, including transaction costs and excise tax | (8,664) | | | (331,406) | | | — | | | (530,794) | | | (862,200) | |
Stock-based compensation | — | | | 107,709 | | | — | | | — | | | 107,709 | |
Balance, April 1, 2023 | 98,649 | | | $ | 3,821,474 | | | $ | (3,175) | | | $ | 84,495 | | | $ | 3,902,794 | |
See accompanying notes.
Qorvo, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2023 | | 2022 | | 2021 |
Cash flows from operating activities: | | | | | |
Net income | $ | 103,152 | | | $ | 1,033,353 | | | $ | 733,611 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation | 206,423 | | | 210,949 | | | 203,206 | |
Intangible assets amortization | 132,425 | | | 150,466 | | | 252,898 | |
Loss on debt extinguishment | — | | | 744 | | | 61,991 | |
Deferred income taxes | (66,145) | | | 31,875 | | | (18,136) | |
Asset impairments | 227,101 | | | — | | | 5,281 | |
Goodwill impairment | 12,411 | | | 48,000 | | | — | |
Stock-based compensation expense | 105,580 | | | 83,507 | | | 89,322 | |
Other, net | 25,299 | | | 14,150 | | | (4,657) | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable, net | 264,781 | | | (107,896) | | | (91,275) | |
Inventories | (81,450) | | | (236,196) | | | 9,390 | |
Prepaid expenses and other assets | 43,240 | | | (176,742) | | | (18,490) | |
Accounts payable | (115,495) | | | 33,950 | | | 34,201 | |
Accrued liabilities | (17,613) | | | (11,815) | | | 30,671 | |
Income taxes payable and receivable | (33,240) | | | (3,139) | | | 34,618 | |
Other liabilities | 36,762 | | | (21,963) | | | (20,778) | |
Net cash provided by operating activities | 843,231 | | | 1,049,243 | | | 1,301,853 | |
Cash flows from investing activities: | | | | | |
Purchases of property and equipment | (158,953) | | | (213,466) | | | (186,960) | |
Purchases of businesses, net of cash acquired | (95) | | | (389,136) | | | (47,069) | |
Other investing activities | 5,639 | | | 6,646 | | | 15,371 | |
Net cash used in investing activities | (153,409) | | | (595,956) | | | (218,658) | |
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 | |
Repurchase of common stock, including transaction costs | (861,751) | | | (1,152,287) | | | (515,084) | |
Proceeds from the issuance of common stock | 32,507 | | | 38,303 | | | 42,598 | |
Tax withholding paid on behalf of employees for restricted stock units | (23,415) | | | (53,382) | | | (38,658) | |
Other financing activities | (694) | | | (9,714) | | | (9,535) | |
Net cash used in financing activities | (853,353) | | | (875,510) | | | (401,923) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (331) | | | (3,281) | | | 1,425 | |
Net (decrease) increase in cash, cash equivalents and restricted cash | (163,862) | | | (425,504) | | | 682,697 | |
Cash, cash equivalents and restricted cash at the beginning of the period | 972,805 | | | 1,398,309 | | | 715,612 | |
Cash, cash equivalents and restricted cash at the end of the period | $ | 808,943 | | | $ | 972,805 | | | $ | 1,398,309 | |
| | | | | |
Reconciliation of cash, cash equivalents and restricted cash: | | | | | |
Cash and cash equivalents | $ | 808,757 | | | $ | 972,592 | | | $ | 1,397,880 | |
Restricted cash included in "Other current assets" and "Other non-current assets" | 186 | | | 213 | | | 429 | |
Total cash, cash equivalents and restricted cash | $ | 808,943 | | | $ | 972,805 | | | $ | 1,398,309 | |
| | | | | |
Supplemental disclosure of cash flow information: | | | | | |
Cash paid during the year for interest, net of amounts capitalized | $ | 66,115 | | | $ | 59,393 | | | $ | 81,232 | |
Cash paid during the year for income taxes, net of refunds | $ | 105,788 | | | $ | 125,322 | | | $ | 53,236 | |
Capital expenditures included in liabilities | $ | 33,107 | | | $ | 36,069 | | | $ | 56,469 | |
See accompanying notes.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 1, 2023
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Qorvo, Inc. ("the Company") is a global leader in the development and commercialization of technologies and products for wireless, wired and power markets. Qorvo, Inc. was formed as the result of a business combination (the "Business Combination") of RF Micro Devices, Inc. and TriQuint Semiconductor, Inc. ("TriQuint"), which closed on January 1, 2015.
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, and its 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.
During the second quarter of fiscal 2023, the Company updated its organizational structure to more closely align technologies and applications with customers and end markets. Prior to this organizational change, the Company operated under two segments (Mobile Products ("MP") and Infrastructure and Defense Products ("IDP")), and subsequent to this organizational change, the Company is operating under three segments (High Performance Analog ("HPA"), Connectivity and Sensors Group ("CSG") and Advanced Cellular Group ("ACG")). Refer to Note 17 for additional information regarding the new organizational structure.
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 prior period amounts (including prior period segment results) have been reclassified to conform to the fiscal 2023 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 1, 2023, April 2, 2022 and April 3, 2021. Fiscal years 2023 and 2022 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 impact of the COVID-19 pandemic and other macroeconomic factors. Actual results could differ materially from these estimates, and such differences could affect the operations reported 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
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 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. In accordance with Accounting Standards Codification ("ASC") 330, "Inventory" ("ASC 330"), abnormal manufacturing costs 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
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Notes to Consolidated Financial Statements (continued)
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.
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 historical experience as well as specifically identified claims. If there is a significant 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 lease 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
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Notes to Consolidated Financial Statements (continued)
addition, the Company made an accounting policy election to exclude leases with an initial term of 12 months or less from the balance sheet.
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 Statement 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 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. 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.
If qualitative assessments conclude that it is more likely than not that the fair value of any reporting unit is less than its carrying value, quantitative assessments are performed on the applicable reporting units. The quantitative assessments consider both the income and market approaches to estimate the fair value of a 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 revenue, 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
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Notes to Consolidated Financial Statements (continued)
approach is based on financial multiples (i.e., multiples of revenue or earnings before income taxes, depreciation and amortization) of comparable companies.
Refer to Note 6 for additional information regarding goodwill and intangible asset impairment testing.
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. IPRD assets represent the fair value of incomplete 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.
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 less than 4% 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.
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Notes to Consolidated Financial Statements (continued)
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. There have been no material impairment losses on accounts receivable for fiscal years 2023, 2022 or 2021. Contract assets and contract liabilities recorded on the Consolidated Balance Sheets were immaterial as of April 1, 2023 and April 2, 2022.
The Company invoices customers upon shipment and recognizes revenue in accordance with delivery terms. As of April 1, 2023, the Company had $167.8 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.
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 1, 2023, total remaining unearned compensation cost related to unvested restricted stock units was $137.6 million, which will be amortized over the weighted-average remaining service period of approximately 1.3 years.
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Notes to Consolidated Financial Statements (continued)
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. Revenue 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 (loss) 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.
Supplemental Financial Information
The "Accrued liabilities" balance as of April 1, 2023 and April 2, 2022, includes accrued compensation and benefits of $92.9 million and $113.6 million, respectively, and accrued rebates of $42.8 million and $33.1 million, respectively.
The "Other current liabilities" balance as of April 1, 2023 includes income taxes payable of $63.6 million and contingent consideration related to the acquisition of United Silicon Carbide, Inc. ("United SiC") of $31.3 million. The "Other current liabilities" balances as of April 2, 2022 includes income taxes payable of $87.8 million.
Recent Accounting Pronouncements and Other Developments
In November 2021, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2021-10, "Government Assistance (Topic 832) - Disclosures by Business Entities about Government Assistance" to increase transparency about certain government assistance or grants received by a business entity. This new guidance requires the disclosure of (1) the types of assistance, (2) an entity's accounting for the assistance, and (3) the effect of the assistance on an entity's financial statements. The Company adopted ASU 2021-10 on April 3, 2022.
From time to time, the Company receives cash grants and tax abatements from U.S. federal and state governments and non-U.S. governments which, in most cases, attach conditions for a specific duration period and generally relate to hiring employees, the construction or acquisition of assets or to developing specific technologies. If conditions are not satisfied, or the duration period for the agreement is infringed, the incentives are subject to reduction, termination, or recapture.
The Company's accounting policy is to recognize a benefit to the income statement over the duration of the program when the conditions, including the required spending attached to the incentive are achieved and the Company is expected to complete any further requirements. A grant that compensates for operational expenses is recognized as a reduction from the nature of the expense the grant is designated to offset. A grant related to property, plant and equipment investments is recognized as a reduction to the cost-basis of the underlying assets with an ongoing reduction to depreciation expense based on the useful lives of the related assets. During fiscal 2023, the Company received a nominal amount related to these programs.
In August 2022, the Creating Helpful Incentives to Produce Semiconductors and Science Act (the "CHIPS Act") was signed into law. The CHIPS Act provides for a 25% refundable tax credit on certain investments in domestic semiconductor manufacturing. The credit is provided for qualifying property, which is placed in service after December 31, 2022. The CHIPS Act also provides for certain other financial incentives to further investments in domestic semiconductor manufacturing. The Company is evaluating the provisions of the new law and its potential impact to the Company.
In August 2022, the Inflation Reduction Act (the "IRA") was signed into law. The IRA establishes a new book minimum tax of 15% on consolidated adjusted GAAP pre-tax earnings for corporations with average income in excess of $1 billion and is effective for tax years beginning after December 31, 2022. In addition, the IRA also introduced a nondeductible 1% excise tax on a publicly traded corporation for the net value of certain stock
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Notes to Consolidated Financial Statements (continued)
repurchases during the tax year (effective for repurchases after December 31, 2022). In the fourth quarter of fiscal 2023, the Company's calculated excise tax was immaterial and was recognized as part of the cost basis of shares acquired in the Consolidated Statement of Stockholders' Equity.
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 37%, 33% and 30% of total revenue in fiscal years 2023, 2022 and 2021, respectively. Samsung Electronics Co., Ltd., accounted for approximately 12%, 11% and 7% of total revenue in fiscal years 2023, 2022 and 2021, respectively. These customers primarily purchase radio frequency ("RF") solutions for a variety of mobile devices from the Company's ACG segment.
The Company's three largest accounts receivable balances comprised approximately 54% and 57% of aggregate gross accounts receivable as of April 1, 2023 and April 2, 2022, respectively.
3. INVENTORIES
The components of inventories, net of reserves, are as follows (in thousands):
| | | | | | | | | | | |
| April 1, 2023 | | April 2, 2022 |
Raw materials | $ | 264,367 | | | $ | 236,095 | |
Work in process | 345,545 | | | 357,332 | |
Finished goods | 186,684 | | | 162,321 | |
Total inventories | $ | 796,596 | | | $ | 755,748 | |
4. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
| | | | | | | | | | | |
| April 1, 2023 | | April 2, 2022 |
Land | $ | 25,842 | | | $ | 25,842 | |
Building and leasehold improvements | 463,888 | | | 432,305 | |
Machinery and equipment | 2,430,307 | | | 2,401,735 | |
Construction in progress | 130,086 | | | 128,317 | |
Total property and equipment, gross | 3,050,123 | | | 2,988,199 | |
Less accumulated depreciation | (1,900,317) | | | (1,734,608) | |
Total property and equipment, net | $ | 1,149,806 | | | $ | 1,253,591 | |
5. BUSINESS ACQUISITIONS
During fiscal 2022, the Company completed the acquisitions of United SiC and NextInput, Inc. ("NextInput"). During fiscal 2021, the Company completed the acquisition of 7Hugs Labs S.A.S. ("7Hugs"). The goodwill
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Notes to Consolidated Financial Statements (continued)
resulting from these acquisitions is attributed to synergies and other benefits that are 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 $236.7 million. The acquisition expanded 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 comprised cash consideration of $227.2 million and contingent consideration of up to $31.3 million which is to be paid to the sellers during the first quarter of fiscal 2024 (in accordance with the terms of the acquisition agreement) due to the achievement of certain revenue and gross margin targets over the period beginning on the acquisition date through December 31, 2022. The estimated fair value of the contingent consideration liability 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 maximum contingent consideration of $31.3 million has been earned and is included in "Other current liabilities" in the Consolidated Balance Sheet as of April 1, 2023, with the increase in fair value recognized in "Other operating expense" in the Consolidated Statement of Income. Refer to Note 7 for further information related to the fair value measurement.
During fiscal years 2023 and 2022, the Company recorded acquisition and integration related costs associated with the acquisition of United SiC totaling $14.6 million and $12.2 million, respectively, in "Other operating expense" in the Consolidated Statements 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 expanded the Company's offerings of MEMS-based products for mobile applications, providing sensing solutions for a broad range of applications in other markets.
During fiscal years 2023, 2022 and 2021, the Company recorded acquisition and integration related costs associated with the acquisition of NextInput totaling $2.1 million, $2.7 million and $1.8 million, respectively, in "Other operating expense" in the Consolidated Statements of Income.
In connection with the Company's fiscal 2022 annual qualitative goodwill impairment assessment, it was determined that the market adoption of the acquired NextInput technology into mobile handsets was 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.
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.
During fiscal years 2023, 2022 and 2021, the Company recorded acquisition and integration related costs associated with the acquisition of 7Hugs totaling $0.1 million, $0.2 million and $2.4 million, respectively, in "Other operating expense" in the Consolidated Statements of Income.
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Notes to Consolidated Financial Statements (continued)
Other Acquisitions
The Company recorded additional acquisition and integration related costs in fiscal years 2023, 2022 and 2021 of $4.1 million, $7.0 million and $23.1 million, respectively, resulting from businesses acquired in fiscal 2020. These costs, which primarily relate to ongoing compensation arrangements, are included in "Other operating expense" in the Consolidated Statements of Income.
6. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for fiscal 2023 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| HPA | | CSG | | ACG | | Total |
Balance as of April 2, 2022 (1) | $ | 501,899 | | | $ | 539,875 | | | $ | 1,733,860 | | | $ | 2,775,634 | |
NextInput measurement period adjustments | — | | | 572 | | | — | | | 572 | |
United SiC measurement period adjustments | (297) | | | — | | | — | | | (297) | |
Goodwill impairment | — | | | (12,411) | | | — | | | (12,411) | |
Effect of changes in foreign currency exchange rates | — | | | (2,685) | | | — | | | (2,685) | |
Balance as of April 1, 2023(1) | $ | 501,602 | | | $ | 525,351 | | | $ | 1,733,860 | | | $ | 2,760,813 | |
(1) The Company’s goodwill balance is presented net of accumulated impairment losses and write-offs totaling $682.0 million and $669.6 million as of April 1, 2023 and April 2, 2022, respectively, which were recognized in fiscal years 2009, 2013, 2014 2022 and 2023.
During the second quarter of fiscal 2023, the Company updated its organizational structure to more closely align technologies and applications with customers and end markets. Prior to the Reorganization ("Pre-Reorganization"), the Company operated under two segments with a total of five reporting units and subsequent to the Reorganization ("Post-Reorganization"), it is operating under three segments with a total of eight reporting units. In accordance with ASC 350, quantitative impairment assessments on each reporting unit were performed immediately before and after the change in organizational structure.
Based on the Pre-Reorganization quantitative assessment performed on July 2, 2022, management concluded there was no goodwill impairment. Based on the Post-Reorganization quantitative analysis performed on July 3, 2022 (the "Quantitative Analysis"), it was determined the fair value of five of the eight reporting units significantly exceeded their carrying values. Therefore, for the annual goodwill impairment assessment that was performed as of January 1, 2023, the Company opted to perform a qualitative impairment assessment for the goodwill related to these five reporting units. The Company concluded based on the relevant facts and circumstances, including the Quantitative Analysis performed, it was more likely than not that the fair value of each of these reporting units exceeded their related carrying value and no further impairment testing was required. In addition, based on the Quantitative Analysis, it was determined the fair value of three of the eight reporting units did not significantly exceed their carrying values. Therefore, the Company performed additional quantitative analyses on two of these reporting units and concluded that based on the relevant facts and circumstances, it was more likely than not that the fair value of each of these reporting units exceeded their related carrying value and no further impairment testing was required.
As part of ongoing efforts to focus on growth drivers and key markets and to streamline operations, in the fourth quarter of fiscal 2023, the Company began to seek strategic alternatives for the third reporting unit (the Company's non-core biotechnology business). Given the future funding requirements necessary to further develop its diagnostic testing solutions and achieve the desired results, the Company decided not to invest further in this business. Therefore, the Company determined that there was a more-likely-than-not expectation of selling or disposing of all, or a portion, of this reporting unit, and impairment testing was triggered. An evaluation of the asset group within this reporting unit was performed which resulted in an impairment of equipment and inventory (refer to Note 12 for additional information). Based on these facts and circumstances, the Company determined the carrying value exceeded the fair value of this reporting unit which resulted in a goodwill impairment charge of $12.4 million (representing the entire goodwill assigned to this reporting unit).
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Notes to Consolidated Financial Statements (continued)
In fiscal 2022, the Company recorded a goodwill impairment charge of $48.0 million related to its NextInput business. This charge in recorded in "Other operating expense" in the fiscal 2022 Consolidated Statement of Income.
The following summarizes information regarding the gross carrying amounts and accumulated amortization of intangible assets (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| April 1, 2023 | | April 2, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Developed technology | $ | 872,106 | | | $ | 382,448 | | | $ | 1,026,690 | | | $ | 420,255 | |
Customer relationships | 104,616 | | | 67,485 | | | 104,778 | | | 47,208 | |
Technology licenses | 1,664 | | | 513 | | | 2,641 | | | 2,169 | |
Trade names | 910 | | | 789 | | | 1,933 | | | 1,358 | |
IPRD | 9,642 | | | N/A | | 9,734 | | | N/A |
Total (1) | $ | 988,938 | | | $ | 451,235 | | | $ | 1,145,776 | | | $ | 470,990 | |
(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. No definite-lived intangible asset impairment charges were recorded for fiscal years 2023 or 2022.
Total intangible assets amortization expense was $132.4 million, $150.5 million and $252.9 million in fiscal years 2023, 2022 and 2021, respectively.
The following table provides the Company's estimated amortization expense for intangible assets for the periods indicated (in thousands): | | | | | |
Fiscal Year | Estimated Amortization Expense |
2024 | $ | 121,000 | |
2025 | 105,000 | |
2026 | 95,000 | |
2027 | 82,000 | |
2028 | 54,000 | |
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 1, 2023 and April 2, 2022 were $20.4 million and $27.1 million, respectively, and are classified as "Long-term investments" in the Consolidated Balance Sheets. During fiscal years 2023, 2022 and 2021, the Company recorded a loss of $4.2 million and 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 $2.5 million, $14.8 million and $5.9 million during fiscal years 2023, 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 following table sets forth, by level within the fair value hierarchy, financial assets and liabilities measured on a recurring basis (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 1, 2023 | | | | | | | | |
| | Marketable equity securities | $ | 1,094 | | | $ | 1,094 | | | $ | — | | | $ | — | | |
| | Invested funds in deferred compensation plan (1) | 40,653 | | | 40,653 | | | — | | | — | | |
| | Contingent earn-out liability (2) | (31,250) | | | — | | | — | | | (31,250) | | |
| | | | | | | | | | | | |
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) | | |
(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. Refer to Note 10 for further information on the Company's non-qualified deferred compensation plan.
(2) The fair value of the contingent consideration liability which related to the acquisition of United SiC (refer to Note 5) was equal to the maximum amount payable at April 1, 2023 and was estimated using an option pricing model at April 2, 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 1, 2023 | | April 2, 2022 |
Other non-current assets | $ | 83,490 | | | $ | 73,683 | |
Other current liabilities | 19,357 | | | 17,393 | |
Other long-term liabilities | 69,156 | | | 61,511 | |
Details of operating leases are as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2023 | | 2022 | | 2021 |
Operating lease expense | $ | 20,162 | | | $ | 19,178 | | | $ | 17,382 | |
Short-term lease expense | 7,798 | | | 7,726 | | | 7,062 | |
Variable lease expense | 5,386 | | | 4,886 | | | 3,972 | |
| | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | 21,480 | | | 20,536 | | | 18,697 | |
| | | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | 28,940 | | | 29,210 | | | 12,899 | |
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The weighted-average remaining lease term and weighted-average discount rate for operating leases are as follows:
| | | | | | | | | | | |
| April 1, 2023 | | April 2, 2022 |
Weighted-average remaining lease term (years) | 6.5 | | 6.9 |
Weighted-average discount rate | 3.98 | % | | 2.99 | % |
The aggregate future lease payments for operating leases as of April 1, 2023 are as follows (in thousands): | | | | | |
Fiscal Year | Lease Payments |
2024 | $ | 22,037 | |
2025 | 17,516 | |
2026 | 15,270 | |
2027 | 12,350 | |
2028 | 11,270 | |
Thereafter | 21,150 | |
Total future lease payments | 99,593 | |
Less imputed interest | (11,080) | |
Present value of lease liabilities | $ | 88,513 | |
9. LONG-TERM DEBT
Long-term debt is as follows (in thousands): | | | | | | | | | | | | |
| April 1, 2023 | | April 2, 2022 | |
1.750% senior notes due 2024 | $ | 500,000 | | | $ | 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 | 1,666 | | | 2,581 | | |
Unamortized premium, discount and issuance costs, net | (3,283) | | | (4,692) | | |
Less current portion of long-term debt | (310) | | | (791) | | |
Total long-term debt | $ | 2,048,073 | | | $ | 2,047,098 | | |
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 "Credit Agreement") with Bank of America, N.A., acting as administrative agent, and a syndicate of lenders. The Credit Agreement amended and restated the previous credit agreement dated as of December 5, 2017. The Credit Agreement includes a senior revolving line of credit (the "Revolving Facility") of up to $300.0 million, and included a senior term loan, that was fully repaid in fiscal 2022. The Revolving Facility is available to finance working capital, capital expenditures and other general corporate purposes.
Pursuant to the 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 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 Credit Agreement. As a result of the LIBOR Transition Amendment, at the Company’s option, loans under the Credit Agreement will bear interest at (i) the Applicable Rate (as defined in the Credit Agreement) plus the Term SOFR (as defined in the 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
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 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 Revolving Facility are subject to a commitment fee ranging from 0.150% to 0.200%.
During fiscal years 2023 and 2022, there were no borrowings under the Revolving Facility.
The 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 1, 2023, 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"). 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 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.
Interest is payable on the 2024 Notes on June 15 and December 15 of each year. Interest paid on the 2024 Notes during fiscal 2023 was $8.8 million.
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 2023, 2022 and 2021 was $37.2 million, $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 2023, 2022 and 2021 was $23.6 million, $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 fiscal 2021 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 a 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 2021 was $37.3 million.
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 1, 2023 was $464.2 million, $785.9 million and $565.3 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 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 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 2023, the Company recognized $72.3 million of interest expense primarily related to the 2024 Notes, the 2029 Notes and the 2031 Notes, which was partially offset by $3.9 million of interest capitalized to property and equipment. 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.
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
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
the discretion of the Company’s Board of Directors. Employees are immediately vested in their own contributions as well as employer matching contributions.
In total, the Company contributed $18.8 million, $17.6 million and $15.6 million to its domestic and foreign defined contribution plans during fiscal years 2023, 2022 and 2021, 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 1, 2023 and April 2, 2022 (included in "Other non-current assets" in the Consolidated Balance Sheets). The pension benefit obligations of both plans were $9.4 million and $12.1 million as of April 1, 2023 and April 2, 2022, 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 judgment including assumptions based on local economic conditions. The net periodic benefit cost was approximately $0.5 million for fiscal 2023 and $0.6 million for fiscal years 2022 and 2021.
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 $40.7 million and $39.4 million as of April 1, 2023 and April 2, 2022, respectively. The current portion of the deferred compensation obligation and fair value of the assets held in the rabbi trust were $1.6 million and $1.5 million as of April 1, 2023 and April 2, 2022, 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 $39.1 million and $37.9 million as of April 1, 2023 and April 2, 2022, 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 1, 2023, the Company's purchase obligations (including capital commitments and purchase commitments under a long-term capacity reservation agreement) totaled approximately $1,283.7 million, of which approximately $657.1 million is expected to be paid during fiscal 2024. In subsequent years, the Company expects to pay approximately $356.5 million, $227.6 million and $42.5 million related to these purchase obligations during fiscal years 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 1, 2023.
Amidst ongoing industry-wide supply constraints, the Company entered into a long-term capacity reservation agreement with a foundry supplier during the second quarter of fiscal 2022. Under this agreement, the Company was required to purchase, and the foundry supplier was required to supply, a certain number of wafers (at predetermined sales prices) for calendar years 2022 through 2025. In connection with this agreement, the Company paid a refundable deposit (which was recorded in "Other non-current assets" in the Consolidated Balance Sheets), and if the purchase commitments per the agreement were not met, under certain circumstances the supplier could deduct the amount of the purchase shortfall from the prepaid refundable deposit at the end of each calendar year.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
During fiscal 2023, the Company experienced unexpectedly weakened demand for 5G handsets in China and EMEA due to unprecedented disruption resulting, in part, from measures taken in China to control the COVID-19 pandemic and the war in Ukraine. As a result, the Company did not meet the minimum purchase commitments under this long-term capacity reservation agreement.
In the first quarter of fiscal 2023, the purchase shortfall resulted in an impairment to the prepaid refundable deposit of approximately $13.0 million, and additional reserves of approximately $11.0 million for inventory in excess of demand forecasts were recorded. Additionally, the Company assessed the future minimum purchase commitments over the remaining term of the agreement and recorded an estimated shortfall of $86.0 million, of which $8.0 million was recorded in "Other current liabilities" and $78.0 million was recorded in "Other long-term liabilities" in accordance with ASC 330. These transactions resulted in a total increase to cost of goods sold of $110.0 million in the first quarter of fiscal 2023.
In October 2022, the Company renegotiated the terms of the agreement with the foundry supplier, which included extending the duration of the agreement through calendar year 2026. As a result of the amended agreement, in the second quarter of fiscal 2023, the Company recorded an impairment to the prepaid refundable deposit of approximately $38.0 million and additional reserves of approximately $5.0 million for inventory in excess of demand forecasts, which reduced the estimated shortfall liability that was previously recorded by $43.0 million. In the third quarter of fiscal 2023, the Company recorded an impairment to the prepaid refundable deposit of approximately $8.0 million and additional reserves of approximately $4.0 million for inventory in excess of demand forecasts, which reduced the estimated shortfall liability that was previously recorded by $12.0 million. There was no impact to the statements of operations in the second or third quarters of fiscal 2023.
In the fourth quarter of fiscal 2023, the Company elected to apply the remaining prepaid refundable deposit against portions of its monthly purchase commitments for the term of the amended agreement in lieu of ordering certain additional silicon wafers. This election was made in order to better align component inventory with the timing of the forecasted finished goods demand and resulted in an impairment to the prepaid refundable deposit of $71.0 million, increasing cost of goods sold by $71.0 million in the fourth quarter of fiscal 2023.
The Company considers customer forecasts, legal obligations, macroeconomic and geopolitical factors as well as market and industry trends, when assessing future minimum purchase commitments. These factors include significant management judgment and estimates and, to the extent that these assumptions are incorrect or there are further declines in customer forecasts, additional charges may be recorded in future periods.
Lease Commitments
Refer to Note 8 for disclosures related to lease commitments.
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
The Company initiated actions to improve efficiencies in its operations and further align the organization with its strategic objectives, which resulted in approximately $32.5 million of restructuring charges recorded in the nine months ended December 31, 2022 (primarily related to the impairment of equipment and a contract cancellation fee). As part of ongoing efforts to focus on growth drivers and key markets and to streamline operations, in the
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
fourth quarter of fiscal 2023, the Company began to seek strategic alternatives related to its non-core biotechnology business. Given the future funding requirements necessary to further develop its diagnostic testing solutions and achieve the desired results, the Company decided not to invest further in this business. Therefore, the Company determined that there was a more-likely-than-not expectation of selling or disposing of all, or a portion, of this reporting unit, and impairment testing was triggered. An evaluation of the asset group within this reporting unit was performed which resulted in an impairment of equipment and inventory of approximately $74.8 million and other charges of approximately $6.8 million. Based on these facts and circumstances, the Company determined that the carrying value exceeded the fair value of this reporting unit which resulted in a goodwill impairment charge of approximately $12.4 million (representing the entire goodwill assigned to this reporting unit). The restructuring charges recorded by the Company are not allocated to its reportable segments.
The Company will continue to evaluate its operating footprint, cost structure and strategic opportunities, but does not expect to incur additional material charges related to its fiscal 2023 restructuring initiatives.
The following table summarizes the charges resulting from the 2023 restructuring actions (in thousands):
| | | | | | | | | | | | | | | | | |
| Cost of Goods Sold | | Other Operating Expense | | Total |
Contract termination and other costs | $ | 3,600 | | | $ | 19,183 | | | $ | 22,783 | |
Asset impairment costs | 43,004 | | | 45,422 | | | 88,426 | |
Goodwill impairment (see Note 6) | — | | | 12,411 | | | 12,411 | |
One-time employee termination benefits | — | | | 2,885 | | | 2,885 | |
Total | $ | 46,604 | | | $ | 79,901 | | | $ | 126,505 | |
The asset impairment costs include inventory write-downs (for inventory expected to be disposed of) and equipment impairments (to adjust the carrying value of certain equipment to reflect its fair value). The estimated fair value of the equipment was determined using a market approach based upon quoted market prices from auction data. The significant inputs related to valuing these assets are classified as Level 2 in the fair value measurement hierarchy.
The following table summarizes the activity related to the Company's restructuring liabilities for the fiscal year ended April 1, 2023 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| One-Time Employee Termination Benefits | | Contract Termination and Other Costs | | Total |
Accrued restructuring balance as of April 2, 2022 | $ | — | | | $ | — | | | $ | — | |
Costs incurred and charged to expense | 2,885 | | | 22,783 | | | 25,668 | |
Cash payments | (2,885) | | | (17,535) | | | (20,420) | |
Accrued restructuring balance as of April 1, 2023 | $ | — | | | $ | 5,248 | | | $ | 5,248 | |
During fiscal years 2022 and 2021, the Company's restructuring charges were $2.1 million and $2.7 million, respectively, primarily related to fiscal 2019 actions to reduce operating expenses and improve manufacturing cost structure.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. INCOME TAXES
Income (loss) before income taxes consists of the following components (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2023 | | 2022 | | 2021 |
United States | $ | (466,070) | | | $ | 69,938 | | | $ | 125,362 | |
Foreign | 590,699 | | | 1,111,146 | | | 682,018 | |
Total | $ | 124,629 | | | $ | 1,181,084 | | | $ | 807,380 | |
The components of the income tax provision are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2023 | | 2022 | | 2021 |
Current tax (expense) benefit: | | | | | |
Federal | $ | (21,704) | | | $ | (16,886) | | | $ | (11,043) | |
State | (488) | | | (274) | | | (140) | |
Foreign | (65,430) | | | (98,696) | | | (80,722) | |
| (87,622) | | | (115,856) | | | (91,905) | |
Deferred tax (expense) benefit: | | | | | |
Federal | 60,351 | | | (18,398) | | | (35,545) | |
State | 2,371 | | | (2,762) | | | (3,771) | |
Foreign | 3,423 | | | (10,715) | | | 57,452 | |
| 66,145 | | | (31,875) | | | 18,136 | |
Total | $ | (21,477) | | | $ | (147,731) | | | $ | (73,769) | |
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 2023, 2022 and 2021 is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2023 | | 2022 | | 2021 |
| Amount | Percentage | | Amount | Percentage | | Amount | Percentage |
Income tax expense at statutory federal rate | $ | (26,172) | | 21.0 | % | | $ | (248,028) | | 21.0 | % | | $ | (169,550) | | 21.0 | % |
(Increase) decrease resulting from: | | | | | | | | |
State benefit (expense), net of federal impact | 2,259 | | (1.8) | | | (1,888) | | 0.2 | | | (743) | | 0.1 | |
Tax credits | 97,809 | | (78.5) | | | 118,877 | | (10.1) | | | 92,532 | | (11.5) | |
Effect of changes in income tax rate applied to net deferred tax assets (1) | (950) | | 0.8 | | | (25,679) | | 2.2 | | | 22,286 | | (2.8) | |
Foreign tax rate difference | 73,491 | | (59.0) | | | 148,932 | | (12.6) | | | 85,851 | | (10.6) | |
Foreign permanent differences and related items | (10,852) | | 8.7 | | | 786 | | (0.1) | | | 9,026 | | (1.1) | |
Change in valuation allowance | 385 | | (0.3) | | | 231 | | (0.1) | | | (1,232) | | 0.2 | |
Expiration of state and foreign attributes | (1,962) | | 1.6 | | | (3,048) | | 0.3 | | | (1,656) | | 0.2 | |
Stock-based compensation | (9,036) | | 7.2 | | | 11,148 | | (0.9) | | | 9,545 | | (1.2) | |
Tax reserve adjustments | (9,437) | | 7.6 | | | (3,262) | | 0.3 | | | (9,979) | | 1.2 | |
U.S. tax on foreign earnings, including GILTI & FDII (2)(3) | (128,708) | | 103.3 | | | (130,874) | | 11.1 | | | (100,830) | | 12.5 | |
Permanent reinvestment assertion | (402) | | 0.3 | | | (1,033) | | 0.1 | | | (8,488) | | 1.1 | |
Impairments and acquisition related adjustments | (5,695) | | 4.5 | | | (12,198) | | 1.0 | | | (919) | | 0.1 | |
Other income tax (expense) benefit | (2,207) | | 1.8 | | | (1,695) | | 0.1 | | | 388 | | (0.1) | |
| $ | (21,477) | | 17.2 | % | | $ | (147,731) | | 12.5 | % | | $ | (73,769) | | 9.1 | % |
(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 a period cost.
(3) Beginning in fiscal 2023 and as required by the Tax Cuts and Jobs Act, the Company was required to capitalize and amortize research and development expenses which were previously expensed for U.S. tax purposes.
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 1, 2023 | | April 2, 2022 |
Deferred income tax assets: | | | |
Research and other tax credits | $ | 57,048 | | | $ | 56,735 | |
Employee benefits | 30,309 | | | 34,189 | |
Inventories | 24,374 | | | 11,592 | |
Net operating loss carryforwards | 22,189 | | | 27,024 | |
Lease liabilities | 18,768 | | | 17,905 | |
Prepaid expenses | 17,360 | | | — | |
Deferred revenue | 14,475 | | | — | |
Capitalized research and development expenses | 13,794 | | | 6,040 | |
Other | 15,898 | | | 10,332 | |
Total deferred income tax assets | 214,215 | | | 163,817 | |
Valuation allowance | (35,896) | | | (36,281) | |
Total deferred income tax assets, net of valuation allowance | $ | 178,319 | | | $ | 127,536 | |
| | | |
Deferred income tax liabilities: | | | |
Intangible assets | $ | (69,050) | | | $ | (79,452) | |
Property and equipment | (39,806) | | | (53,425) | |
Accrued tax on unremitted foreign earnings | (25,948) | | | (22,988) | |
Right-of-use assets | (17,457) | | | (16,591) | |
Other | (2,645) | | | (2,884) | |
Total deferred income tax liabilities | (154,906) | | | (175,340) | |
Net deferred income tax asset (liability) | $ | 23,413 | | | $ | (47,804) | |
| | | |
Amounts included in the Consolidated Balance Sheets: | | | |
Other non-current assets | $ | 38,060 | | | $ | 36,824 | |
Other long-term liabilities | (14,647) | | | (84,628) | |
Net deferred income tax asset (liability) | $ | 23,413 | | | $ | (47,804) | |
The Company has recorded a valuation allowance against certain U.S. and foreign deferred tax assets as of April 1, 2023 and April 2, 2022. 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 will not be realized.
The valuation allowance against deferred tax assets decreased in fiscal years 2023 and 2022 by $0.4 million and $0.2 million, respectively, and increased in fiscal 2021 by $1.2 million.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The components of the change in valuation allowances and ending balances are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2023 | | 2022 | | 2021 |
Beginning valuation allowance | $ | 36,281 | | | $ | 36,512 | | | $ | 35,280 | |
Domestic net operating losses and credits | 583 | | | 1,339 | | | 2,144 | |
Foreign net operating losses and other deferred tax assets | (968) | | | (1,570) | | | (912) | |
Ending valuation allowance | $ | 35,896 | | | $ | 36,281 | | | $ | 36,512 | |
| | | | | |
Components of ending valuation allowance: | | | | | |
Domestic deferred tax assets | $ | 35,570 | | | $ | 34,987 | | | $ | 33,647 | |
Foreign deferred tax assets | 326 | | | 1,294 | | | 2,865 | |
Valuation allowance | $ | 35,896 | | | $ | 36,281 | | | $ | 36,512 | |
As of April 1, 2023, the Company had federal tax loss carryforwards of approximately $32.1 million that expire in fiscal years 2024 to 2043, if unused, and state tax loss carryforwards of approximately $107.9 million that expire in fiscal years 2024 to 2043, if unused. Federal research credits of $102.8 million expire in fiscal years 2040 to 2043, and state research credits of $68.3 million expire in fiscal years 2024 to 2043. The Company had foreign tax loss carryforwards of $96.4 million, which expire in fiscal years 2024 to 2033, 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. In fiscal 2022, the Company negotiated an extension to its tax holiday in Singapore, which is currently expected to expire 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 $65.5 million (an impact of approximately $0.64 per basic and diluted share) in fiscal 2023 and $128.4 million (an impact of approximately $1.17 and $1.15 per basic and diluted share, respectively) in fiscal 2022 as a result of these agreements.
The Company’s gross unrecognized tax benefits totaled $152.3 million, $144.1 million and $134.1 million as of April 1, 2023, April 2, 2022, and April 3, 2021, respectively. Of these amounts, $145.9 million, $137.5 million and $128.7 million as of April 1, 2023, April 2, 2022 and April 3, 2021, 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 $144.1 million as of April 2, 2022 to $152.3 million as of April 1, 2023, primarily due to current year tax positions and the effect of provision-to-return adjustments on prior year positions.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
A summary of the changes in the amount of gross unrecognized tax benefits is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2023 | | 2022 | | 2021 |
Beginning balance | $ | 144,055 | | | $ | 134,068 | | | $ | 119,222 | |
Additions based on positions related to current year | 9,718 | | | 11,826 | | | 10,048 | |
Additions for tax positions in prior years | 2,467 | | | 3,049 | | | 6,240 | |
Reductions for tax positions in prior years | (363) | | | (1,669) | | | (348) | |
Expiration of statute of limitations | (3,546) | | | (3,219) | | | (1,094) | |
Settlements | — | | | — | | | — | |
Ending balance | $ | 152,331 | | | $ | 144,055 | | | $ | 134,068 | |
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 2023, 2022 and 2021, the Company recognized $0.9 million, $(5.1) million and $0.8 million, respectively, of interest and penalties related to uncertain tax positions. Accrued interest and penalties related to unrecognized tax benefits totaled $1.9 million, $1.0 million and $6.2 million as of April 1, 2023, April 2, 2022 and April 3, 2021, respectively.
The unrecognized tax benefits of $152.3 million and accrued interest and penalties of $1.9 million at the end of fiscal 2023 are recorded on the Consolidated Balance Sheet as a $21.0 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 believes it is reasonably possible that $22.1 million of gross unrecognized tax benefits will be reduced within the next 12 months.
The Company files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and international jurisdictions. The Company’s fiscal 2020 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.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 |
| 2023 | | 2022 | | 2021 |
Numerator: | | | | | |
Numerator for basic and diluted net income per share — net income available to common stockholders | $ | 103,152 | | | $ | 1,033,353 | | | $ | 733,611 | |
Denominator: | | | | | |
Denominator for basic net income per share — weighted-average shares | 102,206 | | | 110,196 | | | 114,034 | |
Effect of dilutive securities: | | | | | |
Stock-based awards | 813 | | | 1,350 | | | 1,982 | |
Denominator for diluted net income per share — adjusted weighted-average shares and assumed conversions | 103,019 | | | 111,546 | | | 116,016 | |
Basic net income per share | $ | 1.01 | | | $ | 9.38 | | | $ | 6.43 | |
Diluted net income per share | $ | 1.00 | | | $ | 9.26 | | | $ | 6.32 | |
In the computation of diluted net income per share for fiscal 2023, approximately 0.8 million shares of outstanding stock-based awards were excluded because the effect of their inclusion would have been anti-dilutive. An immaterial number of shares of outstanding stock-based awards were excluded from the computation of diluted net income per share for fiscal years 2022 and 2021 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. No further awards can be granted under these plans.
2012 Stock Incentive Plan - Qorvo, Inc.
The 2012 Stock Incentive Plan (the "2012 Plan") was 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 Internal Revenue Code. Under the 2012 Plan, the Company was 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 aggregate number of shares subject to performance-based restricted stock units awarded for fiscal 2023 under the 2012 Plan was 0.2 million shares. No further awards can be granted under this plan.
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 the Company to issue awards under this plan. The 2013 Incentive Plan replaced the TriQuint 2012 Incentive Plan and 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 who were such prior to the Business Combination or who became employed by the Company or its affiliates after the closing of the Business Combination. No further awards can be granted under this plan.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2015 Inducement Stock Plan - Qorvo, Inc.
The 2015 Inducement Stock Plan provided for the grant of stock options, restricted stock units, stock appreciation rights and other stock-based awards to persons as a material inducement to become employees of the Company or its affiliates. No further awards can be granted under this plan.
2022 Stock Incentive Plan – Qorvo, Inc.
The Company currently grants equity-based awards to eligible employees, directors and independent contractors under the 2022 Stock Incentive Plan (the "2022 Plan"), which was approved by the Company's stockholders on August 9, 2022. Under the 2022 Plan, the Company is permitted to grant awards, such as restricted stock units, restricted stock awards, performance shares, performance units, stock options, stock appreciation rights and phantom stock awards, to eligible participants. The maximum number of shares issuable under the 2022 Plan may not exceed 4.5 million shares (subject to adjustment for anti-dilution purposes). As of April 1, 2023, approximately 4.4 million shares were available for issuance under the 2022 Plan.
Employee Stock Purchase Plan - Qorvo, Inc.
Effective upon closing of the Business Combination, the Company assumed the TriQuint Employee Stock Purchase Plan (the "ESPP"), which is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue 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. As of April 1, 2023, 2.6 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 2023, 0.3 million shares in fiscal 2022 and 0.4 million shares in fiscal 2021.
For fiscal years 2023, 2022 and 2021, the primary stock-based awards and their general terms and conditions are as follows:
Restricted stock units granted by the Company in fiscal years 2023, 2022 and 2021 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 2023, 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 2023, stock-based compensation of $28.5 million was recognized upon the grant of 0.3 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 $105.6 million, $83.5 million and $89.3 million, for fiscal years 2023, 2022 and 2021, respectively, net of expense capitalized into inventory.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 2, 2022 | 258 | | $ | 15.67 | | | | | |
Granted | — | | | — | | | | | |
Exercised | (187) | | $ | 13.74 | | | | | |
Canceled | (2) | | $ | 14.19 | | | | | |
Forfeited | — | | | — | | | | | |
Outstanding as of April 1, 2023 | 69 | | $ | 20.95 | | | 0.35 | | $ | 5,562 | |
Vested and expected to vest as of April 1, 2023 | 69 | | $ | 20.95 | | | 0.35 | | $ | 5,562 | |
Options exercisable as of April 1, 2023 | 69 | | $ | 20.95 | | | 0.35 | | $ | 5,562 | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based upon the Company’s closing stock price of $101.57 as of March 31, 2023 (the last Nasdaq trading day prior to the fiscal year end on April 1, 2023), 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 1, 2023, 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 historical volatility, dividend yield, term and risk-free interest rate. There were no options granted during fiscal years 2023, 2022 and 2021.
The total intrinsic value of options exercised during fiscal years 2023, 2022 and 2021 was $16.5 million, $27.1 million and $66.7 million, respectively.
Cash received from the exercise of stock options and from participation in the employee stock purchase plan (excluding accrued unremitted employee funds) was approximately $32.7 million for fiscal 2023 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 units ("RSUs") awarded under the Company’s director and employee stock plans follows:
| | | | | | | | | | | |
|
RSUs (in thousands) | | Weighted-Average Grant-Date Fair Value |
Balance as of April 2, 2022 | 1,539 | | | $ | 126.46 | |
Granted | 1,125 | | | 104.16 | |
Vested | (703) | | 111.85 | |
Forfeited | (129) | | 122.08 | |
Balance as of April 1, 2023 | 1,832 | | | $ | 118.38 | |
As of April 1, 2023, total remaining unearned compensation cost related to unvested restricted stock units was $137.6 million, which will be amortized over the weighted-average remaining service period of approximately 1.3 years.
The total intrinsic value of restricted stock units that vested during fiscal years 2023, 2022 and 2021 was $74.1 million, $163.6 million and $121.8 million, respectively, based upon the fair market value of the Company’s
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
common stock on the vesting date. The Company settles restricted stock units with newly issued shares of the Company's common stock.
16. STOCKHOLDERS’ EQUITY
Stock Repurchase
On November 2, 2022, 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 the remaining authorized dollar amount under a prior program terminated concurrent with the new authorization.
Under the current program, share 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 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. As of January 1, 2023, the Company's share repurchases in excess of issuances are subject to a 1% excise tax enacted by the IRA. The excise tax is recognized as part of the cost basis of shares acquired in the Consolidated Statements of Stockholders' Equity.
During fiscal years 2023, 2022 and 2021, the Company repurchased approximately 8.7 million shares, 7.3 million shares and 3.6 million shares of its common stock, respectively, for approximately $862.2 million, $1,152.3 million and $515.1 million, respectively (including transaction costs and excise tax, as applicable) under the prior and current share repurchase programs. As of April 1, 2023, approximately $1,705.0 million remains available for repurchases under the current share repurchase program.
Common Stock Reserved For Future Issuance
As of April 1, 2023, the Company had reserved a total of approximately 8.9 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 | 69 |
Possible future issuance under Company stock incentive plans | 4,398 |
Employee stock purchase plan | 2,639 |
Restricted stock-based units outstanding | 1,832 |
Total shares reserved | 8,938 |
17. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
In the second quarter of fiscal 2023, the Company updated its organizational structure to more closely align technologies and applications with customers and end markets. Prior to this organizational change, the Company operated under two segments (MP and IDP) and subsequent to this organizational change, the Company is operating under three segments (HPA, CSG and ACG). The Company's Chief Executive Officer, who is also the Company's chief operating decision maker ("CODM"), allocates resources and evaluates the performance of each of the three operating segments primarily based on operating income. All prior-period segment data has been adjusted to reflect these three operating segments.
HPA is a leading global supplier of RF and power solutions for automotive, defense and aerospace, cellular infrastructure, broadband and other markets. HPA leverages a diverse portfolio of differentiated technologies and products to support multiyear growth trends, including electrification, renewable energy, the increasing semiconductor spend in defense and 5G deployments outside of China.
CSG is a leading global supplier of connectivity and sensor solutions, with broad expertise spanning UWB, Matter®, Bluetooth® Low Energy, Zigbee®, Thread®, Wi-Fi®, cellular Internet of Things, MEMS-based sensors and BAW-based sensors. CSG combines the connectivity and sensors businesses formerly split between MP and IDP. CSG’s
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
markets include smart home, industrial automation, automotive, smartphones, wearables, gaming, and industrial and enterprise access points.
ACG is a leading global supplier of cellular RF solutions for smartphones, wearables, laptops, tablets and other devices. ACG leverages world-class technology and systems-level expertise to deliver a broad portfolio of high performance cellular products to the world's leading smartphone and consumer electronics companies. ACG is a highly diversified supplier of custom and open market cellular solutions, serving iOS and Android original equipment manufacturers.
The "All other" category includes operating expenses such as stock-based compensation expense, amortization of intangible assets, restructuring related charges, acquisition and integration related costs, charges associated with a long-term capacity reservation agreement, 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 CODM does not evaluate operating segments using discrete asset information. The Company’s operating segments do not record intercompany revenue. The Company does not allocate gains and losses from investments, interest expense, other (expense) income, or taxes to operating segments. 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 |
| 2023 | | 2022 | | 2021 |
Revenue: | | | | | |
HPA | $ | 727,187 | | | $ | 707,395 | | | $ | 803,320 | |
CSG | 474,364 | | | 703,881 | | | 653,445 | |
ACG | 2,367,848 | | | 3,234,438 | | | 2,558,542 | |
Total revenue | $ | 3,569,399 | | | $ | 4,645,714 | | | $ | 4,015,307 | |
Operating income (loss): | | | | | |
HPA | $ | 198,820 | | | $ | 210,441 | | | $ | 256,529 | |
CSG | (72,080) | | | 107,814 | | | 66,576 | |
ACG | 627,708 | | | 1,233,388 | | | 968,573 | |
All other | (571,280) | | | (325,574) | | | (385,051) | |
Operating income | 183,168 | | | 1,226,069 | | | 906,627 | |
Interest expense | (68,463) | | | (63,326) | | | (75,198) | |
Other income (expense), net | 9,924 | | | 18,341 | | | (24,049) | |
Income before income taxes | $ | 124,629 | | | $ | 1,181,084 | | | $ | 807,380 | |
.
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2023 | | 2022 | | 2021 |
Reconciliation of "All other" category: | | | | | |
Stock-based compensation expense | $ | (105,580) | | | $ | (83,507) | | | $ | (89,322) | |
Amortization of intangible assets | (132,126) | | | (150,128) | | | (252,137) | |
Restructuring related charges | (114,094) | | | (2,121) | | | (2,722) | |
Acquisition and integration related costs | (23,311) | | | (27,964) | | | (32,946) | |
Charges associated with a long-term capacity reservation agreement (1) | (181,000) | | | — | | | — | |
Goodwill impairment | (12,411) | | | (48,000) | | | — | |
Other (2) | (2,758) | | | (13,854) | | | (7,924) | |
Loss from operations for "All other" | $ | (571,280) | | | $ | (325,574) | | | $ | (385,051) | |
(1) Refer to Note 11 for additional information.
(2) Other includes fixed asset impairments, (loss) gain on sale of fixed assets, start-up costs and other miscellaneous corporate overhead expenses.
Qorvo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 |
| 2023 | | 2022 | | 2021 |
Revenue: | | | | | |
United States | $ | 1,817,960 | | | $ | 1,928,403 | | | $ | 1,631,110 | |
China | 741,405 | | | 1,499,212 | | | 1,579,017 | |
Other Asia | 498,966 | | | 620,620 | | | 363,523 | |
Taiwan | 308,642 | | | 345,869 | | | 248,708 | |
Europe | 202,426 | | | 251,610 | | | 192,949 | |
Total Revenue | $ | 3,569,399 | | | $ | 4,645,714 | | | $ | 4,015,307 | |
The consolidated financial statements include the following long-lived tangible asset amounts related to operations of the Company by geographic region (in thousands):
| | | | | | | | | | | |
| April 1, 2023 | | April 2, 2022 |
Long-lived tangible assets: | | | |
United States | $ | 928,428 | | | $ | 1,007,463 | |
China | 169,215 | | 192,416 |
Other countries | 51,145 | | 53,712 |
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 1, 2023 and April 2, 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended April 1, 2023, 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 1, 2023 and April 2, 2022, and the results of its operations and its cash flows for each of the three years in the period ended April 1, 2023, 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 1, 2023, 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 19, 2023 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
| | | | | |
Description of the Matter | The Company’s inventory, net totaled $796.6 million as of April 1, 2023, representing approximately 11.9% 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. |
| |
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 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 19, 2023
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 1, 2023, 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 1, 2023, 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 1, 2023 and April 2, 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended April 1, 2023, and the related notes and our report dated May 19, 2023 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 19, 2023