What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-17 compared with 2022-02-23 · 56 added, 74 removed, 216 unchanged (38% of the section changed)

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Our product development activities include new proprietary products, advanced packaging, existing product enhancements, software development tools, soft IP, and system solutions for high-growth applications such as Edge AI, 5G infrastructure, platform security, and factory automation.

This discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes included in Item 8.

This discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes included in Part II, Item 8.

"Financial Statements and Supplementary Data" of this report.

Discussions of results for prior periods (fiscal 2021 compared to fiscal 2020) are incorporated by reference from our Annual Report on Form 10-K for the year ended January 1, 2022 .

Impact of the COVID-19 pandemic on our Business

The COVID-19 pandemic has caused, and may continue to cause, a global slowdown of economic activity (including the decrease in demand for certain goods and services), and volatility in and disruption to financial markets, labor markets, and supply chains.

The severity, magnitude and duration of the COVID-19 pandemic and its economic consequences have been and continue to be uncertain, evolving and difficult to predict, and the pandemic’s impact on our operations and financial performance, as well as its impact on our ability to successfully execute our business strategy and initiatives, remains uncertain.

We continue to take actions to safeguard the health and well-being of our employees and our business.

We implemented social distancing policies at our locations around the world, including working from home and eliminating substantially all travel.

Furthermore, we continue to manage our cash position and liquidity needs in light of the rapidly changing environment, and we have additional resources available under our Current Credit Agreement, if needed.

The full extent of the effects of the COVID-19 pandemic and the related governmental, business and travel restrictions in order to contain the virus are continuing to evolve globally, including in response to variants of the virus.

We anticipate that these actions and the global health crisis caused by the COVID-19 pandemic will continue to negatively impact business activity across the globe.

Demand for our products may be impacted given the global reach and economic impact of the virus.

For example, governmental actions or policies or other initiatives to contain the virus could lead to reductions in our end customers’

demand for our products, which could have a negative impact on our revenue.

We have previously seen and could again see delays or disruptions in our supply chain due to governmental restrictions or voluntary precautionary measures adopted by our suppliers.

If our suppliers experience similar impacts, we may have difficulty sourcing materials necessary to fulfill customer production requirements and transporting completed products to our end customers.

It is difficult for us to predict the scope, magnitude, and length of supply chain disruptions.

Supply chain delays and disruptions may also affect the ability of our customers to obtain materials or products from other suppliers which may constrain or delay their demand for our products.

We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities.

It is not clear what the potential effects of any such alterations or modifications may have on our business, including the effects on our customers, employees, and prospects, or on our financial condition or results of operations.

The potential impact of the COVID-19 pandemic on our business, results of operations and financial position is currently uncertain and will depend on many factors that are not within our control, including, but not limited to:

the duration and scope of the pandemic;

governmental, business and individuals’

actions that have been and continue to be taken in response to the pandemic;

general economic uncertainty in key global markets and financial market volatility;

global economic conditions and levels of economic growth;

and the pace of recovery when the COVID-19 pandemic subsides.

Impact of COVID-19 and Global Economic Environment on our Business

The COVID-19 pandemic, increased financial market volatility, inflationary pressure, rising interest rates, recessionary concerns, and geopolitical tension continue to impact business globally and may impact our operations by causing disruption to our labor markets and supply chains.

The ongoing COVID-19 pandemic, including the periodic resurgence of cases relating to the spread of new variants, has and continues to impact worldwide economic activity and poses the risk that our employees, contractors, suppliers and other partners may be prevented from conducting business activities.

The extent to which the COVID-19 pandemic, increased financial market volatility, inflationary pressures and related uncertainty will impact our business activities will depend on future developments that are highly uncertain and cannot be predicted at this time.

See the section entitled “Risk Factors”

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We believe the following accounting policies and the related estimates are critical in the portrayal of our financial condition and results of operations, and require management's most difficult, subjective, or complex judgments.

See " Note 1 - Nature of Operations and Significant Accounting Policies " under Part II, Item 8 of this report for further information on the significant accounting policies and methods used in the preparation of the consolidated financial statements.

See Note 1 - Nature of Operations and Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 of this report for further information on the significant accounting policies and methods used in the preparation of the consolidated financial statements.

Revenue from Contracts with Customers

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For revenue recognized on both sales to distributors and related to HDMI and other royalties, the amount of consideration we expect to be entitled to receive is based on estimates that require assumptions and judgments relating to trends in recent and historical activity.

See " Note 1 - Basis of Presentation and Significant Accounting Policies " under Part II, Item 8 of this report for further information on our recognition of revenue.

See Note 1 - Basis of Presentation and Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 of this report for further information on our recognition of revenue.

Sales to most distributors are made under terms allowing certain price adjustments upon sale to their end customers and limited rights of return of our products held in their inventory.

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(In thousands)

Revenue increased $107.2 million, or 26.3%, in fiscal 2021 compared to fiscal 2020, primarily driven by increased demand for products used in client computing solutions, 5G wireless infrastructure, and industrial and robotics applications.

Revenue increased $145.0 million, or 28.1%, in fiscal 2022 compared to fiscal 2021, primarily from our products used in data center servers, client computing solutions, 5G wireless infrastructure, industrial automation, and robotics applications.

Revenue by End Market

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Communications and Computing, Industrial and Automotive, and Consumer.

We also provide Intellectual Property licensing and services to these end markets.

We also provide IP licensing and services to these end markets.

Within these end markets, there are multiple segment drivers, including:

Communications and Computing:

5G infrastructure deployments, client computing platforms, and cloud and enterprise servers,

datacenter servers and networking equipment, client computing platforms, and 5G communications infrastructure deployments,

Industrial and Automotive:

industrial IoT, factory automation, robotics, and automotive electronics,

smart home, and prosumer.

factory automation, robotics, automotive electronics, and industrial IoT,

smart home, prosumer, and other applications.

We also generate revenue from the licensing of our IP, the collection of certain royalties, patent sales, the revenue related to our participation in consortia and standard-setting activities, and services.

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Total revenue

Revenue from the Communications and Computing end market increased by 25% in fiscal 2021 compared to fiscal 2020 primarily due to increased demand for applications in data center servers, client computing platforms, and 5G infrastructure.

Revenue from the Industrial and Automotive end market increased by 34% in fiscal 2021 compared to fiscal 2020, primarily due to increased demand for our products across multiple applications such as industrial automation and robotics, as well as in Automotive led by adoption in ADAS and infotainment applications .

Revenue from the Consumer end market increased by 11% in fiscal 2021 compared to fiscal 2020 primarily due to increased demand for our products in Consumer end market applications.

Revenue from the Licensing and Services end market increased by 4% in fiscal 2021 compared to fiscal 2020 primarily due to increased licensing and IP royalties.

Revenue from the Communications and Computing end market increased by 26% in fiscal 2022 compared to fiscal 2021 primarily due to content expansion in datacenter servers, new greenfield client computing opportunities, 5G infrastructure, and datacenter networking.

Revenue from the Industrial and Automotive end market increased by 41% in fiscal 2022 compared to fiscal 2021, primarily due to strong customer adoption in a broad range of applications, including industrial automation and robotics.

Growth in Automotive was driven by the adoption of new designs in ADAS and infotainment applications.

Revenue from the Consumer end market decreased by 3% in fiscal 2022 compared to fiscal 2021 primarily due to macroeconomic weakness in Consumer in the current year.

Revenue from the Licensing and Services end market decreased by 16% in fiscal 2022 compared to fiscal 2021 primarily due to decreased licensing and IP royalties.

Revenue by Geography

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Gross margin percentage increased 610 basis points from fiscal 2021 to fiscal 2022.

Improved margins were driven by benefits from our pricing optimization and gross margin expansion strategy.

Improved margins were driven by benefits from our gross margin expansion strategy.

Because of its higher margin, the licensing and services portion of our overall revenue can have a disproportionate impact on Gross margin.

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These expenditures are for the design of new products, IP cores, processes, packaging, and software solutions.

The increase in Research and development expense for fiscal 2021 compared to fiscal 2020 was due primari ly to increased headcount-related costs as we continue to invest in the expansion of our product portfolio and the acceleration of our new product introduction cadence.

We believe that a continued commitment to Research and development is essential to maintaining product leadership and providing innovative new product offerings and, therefore, we expect to continue to increase our investment in Research and development, particularly with expanded investment in the development of software solutions.

The increase in Research and development expense for fiscal 2022 compared to fiscal 2021 was due primari ly to increased headcount-related costs as we continue to invest in our long-term product roadmap.

We believe that investing in research and development is important to delivering innovative products to our customers and, therefore, we expect to continue to increase our investment in research and development.

Selling, General, and Administrative Expense

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Selling, general, and administrative expense includes costs for compensation and benefits related to selling, general, and administrative employees, commissions, depreciation, professional and outside services, trade show, and travel expenses.

The increase in Selling, general, and administrative expense for fiscal 2021 compared to fiscal 2020 was due primarily to increased stock compensation, salaries, and variable compensation related expenses.

The increase in Selling, general, and administrative expense for fiscal 2022 compared to fiscal 2021 was due primarily to increased headcount-related costs to support the growth of our business, and to increased legal expenses primarily related to the defense of claims outside the ordinary course of business.

Amortization of Acquired Intangible Assets

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Percentage of revenue

The decrease in Amortization of acquired intangible assets for fiscal 2021 compared to fiscal 2020 was due to the end of the amortization period for the majority of our legacy acquired intangible assets during the first quarter of fiscal 2020, partially offset by amortization expense for new intangible assets added in the fourth quarter of fiscal 2021 through the acquisition of Mirametrix, Inc.

The increase in Amortization of acquired intangible assets for fiscal 2022 compared to fiscal 2021 was due to the amortization expense for new intangible assets added in the fourth quarter of fiscal 2021 through the acquisition of Mirametrix, Inc., partially offset by end of the amortization period during the first quarter of fiscal 2022 for acquired intangible assets from previous acquisitions.

Restructuring Charges

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Details of our restructuring plans and expenses incurred under them are discussed in Note 9 - Restructuring to our Consolidated Financial Statements in Part II, Item 8 of this report.

Restructuring charges decreased in fiscal 2021 compared to fiscal 2020, as we had no significant restructuring activity in the current year.

Restructuring charges increased in fiscal 2022 compared to fiscal 2021 due to additional lease right-of-use asset impairment charges for our partially vacated facility in San Jose, California and contract termination fees in the current year under the internal restructuring plan that our management approved and executed in April 2019, as compared to minimal activity in the prior year.

Acquisition Related Charges

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Acquisition related charges include legal and professional fees directly related to acquisitions.

For fiscal 2021, Acquisition related charges were entirely attributable to our acquisition of Mirametrix in November 2021 and were comprised primarily of professional services including legal and accounting fees, as well as closing costs.

For fiscal 2022 and 2021, Acquisition related charges were entirely attributable to our acquisition of Mirametrix in November 2021 and were comprised primarily of professional services including legal and accounting fees, as well as closing costs.

Interest Expense

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Percentage of revenue

Interest expense is primarily related to our long-term debt, which is further discussed under the "Credit Arrangements" heading in the Liquidity and Capital Resources section, below.

Interest expense is primarily related to our long-term debt.

This interest expense is comprised of contractual interest and amortization of original issue discount and debt issuance costs based on the effective interest method.

The decrease in Interest expense for fiscal 2021 compared to fiscal 2020 was driven by the significant reduction in the effective interest rate on our long term debt coupled with the reduction in the principal balance of our long-term debt.

The increase in Interest expense for fiscal 2022 compared to fiscal 2021 was driven by the increase in the applicable base rate for our long-term debt, the adjusted Term Secured Overnight Financing Rate ("SOFR") from September 1, 2022, and the London Interbank Offered Rate ("LIBOR") prior to that date.

Other (Expense) Income, net

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Percentage of revenue

For fiscal 2021 compared to fiscal 2020, the increase in Other (expense) income, net was largely driven by higher foreign currency exchange losses.

For fiscal 2022 compared to fiscal 2021, the increase in Other (expense) income, net was primarily due to the $0.7 million loss on refinancing of our long-term debt during the current year .

The composition of our Income tax expense is presented in the following table:

(In thousands)

Income tax expense

Our Income tax expense is composed primarily of foreign income and withholding taxes, partially offset by benefits resulting from the release of uncertain tax positions ("UTP") due to statute of limitation expirations that occurred in the respective periods.

The increase in expense in fiscal 2021 as compared to fiscal 2020 is primarily due to changes in uncertain tax positions and increased worldwide income .

We updated our evaluation of the valuation allowance position in the United States through January 1, 2022 and concluded that we should continue to maintain a full valuation allowance against the net federal and state deferred tax assets.

Income tax expense (benefit)

Our Income tax expense (benefit) is composed primarily of foreign income and withholding taxes, partially offset by benefits resulting from the release of uncertain tax positions ("UTP") due to statute of limitation expirations that occurred in the respective periods.

The increase in expense in fiscal 2022 as compared to fiscal 2021 is primarily due to increased worldwide income and changes in uncertain tax positions .

We updated our evaluation of the valuation allowance position in the United States through December 31, 2022 and concluded that we should continue to maintain a full valuation allowance against the net federal and state deferred tax assets.

In making this evaluation, we considered the uncertain stability of the current economic and operating environment and estimates about our ability to generate taxable income in future periods within the United States.

We continue to evaluate future projected financial performance to determine whether such performance is sufficient evidence to support a reduction in or reversal of the valuation allowance.

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The following sections discuss material changes in our financial condition from the end of fiscal 2021, including the effects of changes in our Consolidated Balance Sheets, and the effects of our credit arrangements and contractual obligations on our liquidity and capital resources.

There is significant uncertainty around the extent and duration of the disruption to our business from the COVID-19 pandemic, and our liquidity and working capital needs may be impacted in future periods as a result of the effects of the COVID-19 pandemic.

There continues to be uncertainty around the extent and duration of the disruption to our business, including from the effects of the ongoing COVID-19 pandemic, market volatility, and inflationary pressures, which may impact our liquidity and working capital needs in future periods.

We have historically financed our operating and capital resource requirements through cash flows from operations, and from the issuance of long-term debt to fund acquisitions.

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We believe that our financial resources, including current cash and cash equivalents, cash flow from operating activities, and our credit facilities, will be sufficient to meet our liquidity and working capital needs through at least the next 12 months.

As of January 1, 2022, we did not have significant long-term commitments for capital expenditures.

For further information on our cash commitments for operating lease liabilities and required future principal payments on our long-term debt, see Note 10 - Leases and 

Note 8 - Long-Term Debt , respectively, under Part II, Item 8 of this report.

On September 1, 2022, we entered into our 2022 Credit Agreement, as described in Note 8 - Long-Term Debt to our Consolidated Financial Statements in Part II, Item 8 of this report.

As of December 31, 2022, we did not have significant long-term commitments for capital expenditures.

For further information on our cash commitments for operating lease liabilities, see Note 10 - Leases to our Consolidated Financial Statements in Part II, Item 8 of this report.

In the future, we may continue to consider acquisition opportunities to further extend our product or technology portfolios and further expand our product offerings.

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(In thousands)

January 1, 2022

December 31, 2022

January 1, 2022

Cash and cash equivalents

As of January 1, 2022, we had Cash and cash equivalents of $131.6 million, of which approximately $59.1 million in Cash and cash equivalents was held by our foreign subsidiaries.

As of December 31, 2022, we had Cash and cash equivalents of $145.7 million, of which approximately $30.9 million in Cash and cash equivalents was held by our foreign subsidiaries.

We manage our global cash requirements considering, among other things, (i) available funds among our subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances.

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This should not result in our recording significant additional tax expense as we have accrued expense based on current withholding rates.

As of January 1, 2022, we could access all cash held by our foreign subsidiaries without incurring significant additional expense.

The net decrease in Cash and cash equivalents of $50.8 million between January 2, 2021 and January 1, 2022 was primarily driven by cash flows from the following activities:

As of December 31, 2022, we could access all cash held by our foreign subsidiaries without incurring significant additional expense.

The net increase in Cash and cash equivalents of $14.2 million between January 1, 2022 and December 31, 2022 was primarily driven by cash flows from the following activities:

Operating activities —

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Cash provided by operating activities was $238.8 million in fiscal 2022 compared to $167.7 million in fiscal 2021.

This increase of $76.0 million was primarily driven by an increase of $54.2 million provided by improved operating performance, coupled with $21.8 million of favorable changes in working capital.

We are using cash provided by operating activities to fund our operations.

This increase of $71.1 million was primarily driven by an increase of $98.9 million provided by improved operating performance, partially offset by $27.8 million of changes in working capital, primarily from cash used by inventories.

Investing activities —

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Net cash used by investing activities in fiscal 2022 was $34.9 million compared to $89.8 million in fiscal 2021.

This $68.9 million increase was primarily due to the acquisition of Mirametrix in the current year, which used cash, net of cash acquired, of $68.1 million.

This $54.9 million decrease was primarily a result of the acquisition of Mirametrix in the prior year, which used cash, net of cash acquired, of $68.1 million.

Total cash used for capital expenditures and payments for software and intellectual property licenses increased $13.2 million to $34.9 million in fiscal 2022 from $21.7 million in fiscal 2021.

Financing activities —

Financing cash flows consist primarily of activity on our long-term debt, proceeds from the exercise of options to acquire common stock, tax payments related to the net share settlement of restricted stock units, and repurchases of common stock.

Financing cash flows consist primarily of repurchases of common stock, tax payments related to the net share settlement of restricted stock units, proceeds from the exercise of options to acquire common stock, and activity on our long-term debt.

Net cash used by financing activities in fiscal 2022 was $188.1 million compared to $128.6 million in fiscal 2021.

This $59.5 million increase was due to the following mix of activities.

During fiscal 2021, we paid required quarterly installments on our long-term debt totaling $13.1 million.

During fiscal 2020, we drew $50.0 million on our revolving loan facility to further strengthen our liquidity position, and we paid quarterly installments totaling $26.3 million on our long-term debt, which fulfilled the required quarterly installments through the first quarter of fiscal 2021.

During fiscal 2022, we repurchased approximately 2.0 million shares of common stock for $110.1 million compared to repurchases in fiscal 2021 of approximately 1.3 million shares of common stock for $70.1 million.

Payments for tax withholdings on vesting of RSUs partially offset by employee exercises of stock options used net cash flows of $47.8 million in fiscal 2022, an increase of approximately $2.4 million from the net $45.4 million used in fiscal 2021.

During fiscal 2021, we also repurchased approximately 1.3 million shares of common stock for $70.1 million compared to repurchases in fiscal 2020 of approximately 0.4 million shares of common stock for $15.0 million.

In September 2022, we entered into our 2022 Credit Agreement and drew down an initial $150.0 million revolving loan at closing, which we used to pay off the $150.0 million outstanding balance on our previous term and revolving loans.

In connection with the 2022 Credit Agreement, we paid $1.4 million in debt issuance costs.

During fiscal 2022, we made a discretionary payment of $20.0 million on our current revolving loans, and we paid required quarterly installments on our previous long-term debt totaling $8.8 million. During fiscal 2021, we paid required quarterly installments on our long-term debt totaling $13.1 million.

Accounts receivable, net

(In thousands)

January 1, 2022

December 31, 2022

January 1, 2022

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Days sales outstanding - Overall

Accounts receivable, net as of January 1, 2022 increased by approximately $15.3 million, or approximately 24%, compared to January 2, 2021.

This resulted primarily from increased shipments in the fourth quarter of fiscal 2021 compared to the fourth quarter of fiscal 2020.

Accounts receivable, net as of December 31, 2022 increased by approximately $14.2 million, or approximately 18%, compared to January 1, 2022.

This resulted primarily from higher revenue shipments in the fourth quarter of fiscal 2022 compared to the fourth quarter of fiscal 2021.

We calculate Days sales outstanding on the basis of a 365-day year as Accounts receivable, net at the end of the quarter divided by sales during the quarter annualized and then multiplied by 365.

(In thousands)

January 1, 2022

December 31, 2022

January 1, 2022

Days of inventory on hand

Inventories as of January 1, 2022 increased $3.0 million, or approximately 5%, compared to January 2, 2021 primarily to meet the increased demands of our customers.

Inventories as of December 31, 2022 increased $42.8 million, or approximately 63%, compared to January 1, 2022 primarily to meet the increased demands of our customers and for new product ramps.

The Days of inventory on hand ratio compares the inventory balance at the end of a quarter to the cost of sales in that quarter.

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Credit Arrangements

On May 17, 2019, we entered into our Current Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and other lenders.

The details of this arrangement are described in " Note 8 - Long-Term Debt " in the accompanying Notes to Consolidated Financial Statements.

As of January 1, 2022, we had no used or unused credit arrangements beyond the secured revolving loan facility described in the Current Credit Agreement.

On September 1, 2022, we entered into our 2022 Credit Agreement.

The details of this arrangement are described in Note 8 - Long-Term Debt to our Consolidated Financial Statements in Part II, Item 8 of this report.

As of December 31, 2022, we had no used or unused credit arrangements beyond the secured revolving loan facility described in the 2022 Credit Agreement.

Share Repurchase Program

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New Accounting Pronouncements

The information contained under the heading "New Accounting Pronouncements" in Note 1 - Nature of Operations and Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 is incorporated by reference into this Part II, Item 7.

The information contained under the heading "New Accounting Pronouncements" in Note 1 - Nature of Operations and Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 of this report is incorporated by reference into this Part II, Item 7.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis