What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-26 compared with 2022-10-26 · 63 added, 163 removed, 148 unchanged (60% of the section changed)

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Fiscal 2023 will have 52 weeks and fiscal 2022 had 52 weeks.

Our third quarter of fiscal 2022 ended October 1, 2022.

Our third quarter of fiscal 2021 ended October 2, 2021.

Our first quarter of fiscal 2023 ended April 1, 2023.

Our first quarter of fiscal 2022 ended April 2, 2022.

Impact of COVID-19

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However, rapid changes in our markets and across our product areas make it difficult for us to accurately estimate the impact of seasonal factors on our business.

Discontinued Operations

On July 26, 2021, we sold our infrastructure and automotive business to Skyworks Solutions, Inc.

for $2.75 billion in cash.

The prior year comparable period results of operations of the sold component have been presented in the accompanying Condensed Consolidated Financial Statements as discontinued operations and, therefore, are excluded from the following discussion of the results of our continuing operations.

Current Period Highlights of Continuing Operations

Revenues increased $85.0 million in the recent quarter compared to the third quarter of fiscal 2021 due to increased revenues from both our Industrial & Commercial products and Home & Life products.

Gross profit increased $56.1 million during the same period due primarily to increased product sales.

Gross margin increased to 61.4% in the recent quarter compared to 59.2% in the third quarter of fiscal 2021 due to variations in product mix and increases in the price of our products.

Operating expenses increased by $39.5 million in the recent quarter compared to the third quarter of fiscal 2021 due primarily to increased personnel-related expenses and outside services.

Operating income (loss) in the recent quarter was $30.2 million compared to $(9.3) million in the third quarter of fiscal 2021.

We ended the third quarter with $1.4 billion in cash, cash equivalents and short-term investments.

Net cash provided by operating activities was $127.4 million during the recent nine-month period.

Accounts receivable were $76.7 million at October 1, 2022, representing 26 days sales outstanding (DSO).

Inventory was $88.4 million at October 1, 2022, representing 76 days of inventory (DOI).

In the third quarter, we acquired 0.7 million shares of our common stock for $87.5 million.

Through acquisitions and internal development efforts, we have continued to diversify our product portfolio and introduce new products and solutions with added functionality and integration.

In the first nine months of fiscal 2022, we introduced a portfolio of Matter development solutions providing support for Matter over Wi-Fi®, Matter over Thread, Bluetooth® Low Energy (LE) commissioning, and Matter bridges to Zigbee® and Z-Wave®;

an end-to-end development platform with complete connectivity support for Amazon Sidewalk;

a new flagship SoC and power amplifier for Wi-SUN®, the FG25 SoC and EFF01 Front End Module designed to provide a sub-gigahertz transmission range of up to 3 kilometers in dense urban environments with no data loss;

our first Wi-Fi 6 and Bluetooth LE SoC family ideal for battery-powered or energy-efficient IoT devices with always-on cloud connectivity;

a Bluetooth Location Services solution using accurate, low-power Bluetooth devices to simplify Angle of Arrival (AoA) and Angle of Departure (AoD) location services;

and a family of 2.4 GHz wireless SoCs for Bluetooth and multi-protocol operations with a built-in AI and Machine Learning (ML) accelerator, improving performance for AI and ML applications on battery-powered edge devices.

We plan to continue introducing products that increase the content we provide for existing applications, thereby enabling us to serve markets we do not currently address and expand our total available market opportunity.

During the nine months ended October 1, 2022, we had no customer that represented more than 10% of our revenues.

Current Period Highlights

Revenues increased $13.0 million in the recent quarter compared to the first quarter of fiscal 2022 due to increased revenues from our Industrial & Commercial products offset by decreased revenue from our Home & Life products.

Gross profit decreased $1.9 million during the same period due decreased gross profit from our Home & Life products offset by increased gross profit from our Industrial & Commercial products.

Gross margin decreased to 62.3% in the recent quarter compared to 66.6% in the first quarter of fiscal 2022 primarily due to variations in the price and costs of our products and variations in product mix.

Operating expenses increased by $12.1 million in the recent quarter compared to the first quarter of fiscal 2022 due primarily to increased personnel-related expenses, new product introduction costs and occupancy costs.

Operating income in the recent quarter was $19.6 million compared to $33.6 million in the first quarter of fiscal 2022.

We ended the first quarter of fiscal 2023 with $1.2 billion in cash, cash equivalents and short-term investments.

Net cash used in operating activities was $13.3 million during the recent three-month period.

Accounts receivable were $87.7 million at April 1, 2023, representing 32 days sales outstanding (“DSO”).

Inventory was $133.2 million at April 1, 2023, representing 129 days of inventory (“DOI”).

In three months ended April 1, 2023, we acquired 0.1 million shares of our common stock for $13.5 million.

We have continued to diversify our product portfolio and introduce new products and solutions with added functionality and integration.

In the first three months of fiscal 2023, we introduced new integrated Bluetooth® SoC and MCU families that offer IoT device designers energy efficiency, high performance and trusted security for the smallest form factor IoT devices.

We plan to continue introducing products that expand the capabilities we offer in order to serve both current and emerging applications, enabling us to address new markets and expand our total available market opportunity.

During the three months ended April 1, 2023, we had no customer that represented more than 10% of our revenues.

In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers.

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Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer.

Two of our distributors who sell to our customers, Arrow Electronics and Edom Technology, each represented more than 10% of our revenues during the nine months ended October 1, 2022.

The percentage of our revenues derived from outside of the United States was 84% during the nine months ended October 1, 2022.

Two of our distributors who sell to our customers, Arrow Electronics and Edom Technology, each represented more than 10% of our revenues during the three months ended April 1, 2023.

The percentage of our revenues derived from outside of the United States was 84% during the three months ended April 1, 2023.

All of our revenues to date have been denominated in U.S.

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Provision for Income Taxes.

Provision for income taxes includes both domestic and foreign income taxes at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences.

Equity-method Earnings.

Equity-method earnings represents income or loss on our equity-method investment.

Income from discontinued operations, net of income taxes.

Income from discontinued operations, net of income taxes includes the results of operations of our former infrastructure and automotive business.

Equity-method Earnings (Loss).

Equity-method earnings (loss) represents income or loss on our equity-method investment.

The following table sets forth our Condensed Consolidated Statements of Income data as a percentage of revenues for the periods indicated:

Three Months Ended

Nine Months Ended

Cost of revenues

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Operating expenses

Operating income (loss)

Operating income

Other income (expense):

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Interest expense

Income (loss) from continuing operations before income taxes

Income before income taxes

Provision for income taxes

Equity-method earnings

Income (loss) from continuing operations

Income from discontinued operations, net of income taxes

Equity-method earnings (loss)

Three Months Ended

Nine Months Ended

(in millions)

Industrial & Commercial

The increase in revenues in the recent three-month period was due to increased revenues of $52.3 million from our Industrial & Commercial products and $32.7 million from our Home & Life products.

The increase in revenues in the recent nine-month period was due to increased revenues of $155.0 million from our Industrial & Commercial products and $99.6 million from our Home & Life products.

Unit volumes of our products increased during the three and nine months ended October 1, 2022 while average selling prices increased substantially compared to the three and nine months ended October 2, 2021.

The increase in revenues in the recent three-month period was due to increased revenues of $24.0 million from our Industrial & Commercial products offset in part by decreased revenues of $11.0 million from our Home & Life products.

Average selling prices of our products increased while unit volumes decreased in the recent three-month period.

The average selling prices of our products may fluctuate significantly from period to period due to changes in product mix, pricing decisions and other factors.

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Three Months Ended

Nine Months Ended

(in millions)

Gross profit increased during the recent three- and nine- month periods due primarily to increased product sales.

The increase in gross profit in the recent periods was due to increases in gross profit for our Industrial & Commercial products and Home & Life products.

Gross margin increased primarily due to variations in product mix and increases in the price of our products.

Gross profit decreased during the recent three-month period due to a decrease in gross profit for our Home & Life product group offset by an increase in gross profit for our Industrial & Commercial product group.

Gross margin decreased primarily due to variations in the price and costs of our products and variations in product mix.

Increased product demand and production capacity constraints have increased the selling price and costs of our products, and has resulted in period-to-period fluctuations in our gross margin.

We expect the prices we pay for inventory to continue to increase in future periods and that this will reduce our gross margins.

We may experience variations in the average selling prices of certain of our products.

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Three Months Ended

Nine Months Ended

(in millions)

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Percent of revenue

The increase in research and development expense in the three-month period was primarily due to increases of $12.1 million for personnel-related expenses.

The increase in research and development expense in the nine-month period was primarily due to increases of $38.3 million for personnel-related expenses, $1.7 million for depreciation expense and $1.2 million for new product introduction costs.

The decrease in research and development expense as a percent of revenues in the current periods was due to our increased revenues.

We expect that research and development expense will remain relatively stable in absolute dollars in the fourth quarter of fiscal 2022.

The increase in research and development expense in the recent three-month period was primarily due to increases of $8.3 million for personnel-related expenses, $1.2 million for new product introduction costs and $1.0 million for occupancy costs.

We expect that research and development expense will remain relatively stable in absolute dollars in the second quarter of fiscal 2023.

Selling, General and Administrative

Three Months Ended

Nine Months Ended

(in millions)

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Percent of revenue

The increase in selling, general and administrative expense in the three- and nine-month periods was primarily due to increases of $2.8 million and $9.2 million, respectively, for personnel-related expenses, and $1.7 million and $3.0 million, respectively, for outside services.

The decrease in selling, general and administrative expense as a percent of revenues in the current periods was due to our increased revenues.

We expect that selling, general and administrative expense will decrease in absolute dollars in the fourth quarter of fiscal 2022.

We expect that selling, general and administrative expense will remain relatively stable in absolute dollars in the second quarter of fiscal 2023.

Interest Income and Other, Net

Interest income and other, net for the three and nine months ended October 1, 2022 was $4.7 million and $9.6 million, respectively, compared to $1.5 million and $3.1 million for the three and nine months ended October 2, 2021, respectively.

The increase in interest income and other, net in the recent three-month period was primarily due to increased interest income earned as a result of higher market interest rates.

The increase in interest income and other, net in the recent nine-month period was primarily due to increased interest income earned as a result of higher investment balances and higher market interest rates.

Interest income and other, net for the three months ended April 1, 2023 was $4.8 million compared to $1.5 million for the three months ended April 2, 2022.

The increase in interest income and other, net in the recent three-month period was primarily due to increased interest income earned as a result of higher market interest rate.

Interest Expense

Interest expense for the three and nine months ended October 1, 2022 was $1.5 million and $4.9 million, respectively, compared to $6.6 million and $24.4 million for the three and nine months ended October 2, 2021, respectively.

The decrease in interest expense in the recent three-month period was primarily due to a decrease of $5.1 million in amortization of debt discount as a result of our adoption of ASU 2020-06 in fiscal 2022.

The decrease in interest expense in the recent nine-month period was primarily due to a decrease of $16.1 million in amortization of debt discount in the current period and a loss of $3.4 million recorded on the early extinguishment of the remaining 2022 Notes in the prior period.

See Note 7, Debt , to the Condensed Consolidated Financial Statements for additional information.

Interest expense for the three months ended April 1, 2023 and April 2,2022 was $1.7 million.

Provision for Income Taxes

Three Months Ended

Nine Months Ended

(in millions)

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Effective tax rate

The increase in the effective tax rate for the three and nine months ended October 1, 2022 was primarily due to the recognition of certain tax benefits for the three and nine months ended October 2, 2021 in discontinued operations under the ASU 2019-12 and the required adoption of new U.S.

tax rules regarding the capitalization of research and experimental costs in the current fiscal year.

Equity-method Earnings

Equity-method earnings for the three and nine months ended October 1, 2022 was $1.8 million and $3.0 million, respectively, compared to $4.0 million and $5.9 million for the three and nine months ended October 2, 2021, respectively.

The decrease in equity-method earnings in the recent periods in fiscal 2021 was due a decrease in the unrealized gains on an equity-method investment.

Income from discontinued operations, net of income taxes

Three Months Ended

Nine Months Ended

(in millions)

Income from discontinued operations, net of income taxes

There was no income from prior year discontinued operations in the current periods.

Income from discontinued operations for the three and nine months ended October 2, 2021 included revenues of $28.2 million and $233.9 million, income before income taxes of $2.4 billion and $2.5 billion, and income tax provisions of $333.2 million and $330.9 million, respectively.

Income from discontinued operations, net of income taxes in the prior three- and nine- month periods included a gain on sale of $2.1 billion, net of tax.

The increase in the effective tax rate for the three months ended April 1, 2023 is primarily due to a decrease in the Company’s foreign tax rate benefit and an increase to nondeductible stock-based compensation, partially offset by an increase in the Company’s Federal research and development credit benefit year over year, further impacted by these items’ relation to pre-tax book income.

Equity-method Earnings (Loss)

Equity-method earnings (loss) for the three months ended April 1, 2023 were $(1.0) million compared to $1.2 million for the three months ended April 2, 2022.

Business Outlook

The following represents our business outlook for the fourth quarter of fiscal 2022.

The following represents our business outlook for the second quarter of fiscal 2023.

Income Statement Item

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Liquidity and Capital Resources

Our principal sources of liquidity as of October 1, 2022 consisted of $1.4 billion in cash, cash equivalents and short-term investments, of which approximately $0.9 billion was held by our U.S.

Our principal sources of liquidity as of April 1, 2023 consisted of $1.2 billion in cash, cash equivalents and short-term investments, of which $0.8 billion was held by our U.S.

The remaining balance was held by our foreign subsidiaries.

Our cash equivalents and short-term investments consisted of government debt securities, which include agency bonds, municipal bonds, variable rate demand notes and U.S.

Our cash equivalents and short-term investments consisted of government debt securities, which include agency bonds, municipal bonds and U.S.

government securities;

corporate debt securities, which include asset-backed securities, corporate bonds, commercial paper and Yankee bonds;

corporate debt securities, which include asset-backed securities, corporate bonds and Yankee bonds;

and money market funds.

Operating Activities

Net cash provided by operating activities was $127.4 million during the nine months ended October 1, 2022, compared to net cash provided of $48.2 million during the nine months ended October 2, 2021.

Operating cash flows during the nine months ended October 1, 2022 reflect our net income of $66.0 million, adjustments of $72.5 million for depreciation, amortization, stock-based compensation, equity-method earnings and deferred income taxes, and a net cash outflow of $11.1 million due to changes in our operating assets and liabilities.

Accounts receivable decreased to $76.7 million at October 1, 2022 from $98.3 million at January 1, 2022.

The decrease in accounts receivable resulted primarily from normal variations in the timing of collections and billings.

Our DSO was 26 days at October 1, 2022 and 42 days at January 1, 2022.

Inventory increased to $88.4 million at October 1, 2022 from $49.3 million at January 1, 2022.

Net cash used in operating activities was $13.3 million during the three months ended April 1, 2023, compared to net cash provided of $85.2 million during the three months ended April 2, 2022.

Operating cash flows during the three months ended April 1, 2023 reflect our net income of $14.0 million, adjustments of $28.3 million for depreciation, amortization, stock-based compensation, equity-method earnings (loss) and deferred income taxes, and a net cash outflow of $55.6 million due to changes in our operating assets and liabilities.

Accounts receivable increased to $87.7 million at April 1, 2023 from $71.4 million at December 31, 2022.

The increase in accounts receivable resulted primarily from normal variations in the timing of collections and billings.

Our DSO was 32 days at April 1, 2023 and 25 days at December 31, 2022.

Inventory increased to $133.2 million at April 1, 2023 from $100.4 million at December 31, 2022.

Our inventory levels will vary based on the availability of supply, and to a lesser extent, the impact of variations between forecasted demand used for purchasing inventory and actual demand.

Increased product demand and higher product costs have increased the value of the inventory we hold.

Our DOI was 76 days at October 1, 2022 and 55 days at January 1, 2022.

Our DOI was 129 days at April 1, 2023 and 90 days at December 31, 2022.

Investing Activities

Net cash provided by investing activities was $40.8 million during the nine months ended October 1, 2022, compared to net cash used of $864.2 million during the nine months ended October 2, 2021.

The decrease in cash outflows was principally due to a decrease in cash outflows of $905.0 million from net purchases, sales and maturities of marketable securities in the current period.

Net cash provided by investing activities was $254.3 million during the three months ended April 1, 2023, compared to net cash used of $217.4 million during the three months ended April 2, 2022.

The increase in cash inflows was principally due to an increase in cash inflows of $474.8 million from net purchases, sales and maturities of marketable securities in the current period.

Financing Activities

Net cash used in financing activities was $690.1 million during the nine months ended October 1, 2022, compared to net cash used of $841.7 million during the nine months ended October 2, 2021.

The decrease in cash outflows was principally due to a decrease of $140.6 million in payments on debt in the current period.

Net cash used in financing activities was $24.5 million during the three months ended April 1, 2023, compared to net cash used of $166.5 million during the three months ended April 2, 2022.

The decrease in cash outflows was principally due to a decrease of $140.2 million for repurchases of our common stock in the current period.

Discontinued Operations

Net cash used in discontinued operations was $69.5 million during the nine months ended October 1, 2022, compared to net cash provided of $2.8 billion during the nine months ended October 2, 2021.

The decrease in cash inflows was principally due to $2.75 billion in proceeds from the sale of our infrastructure and automotive business in the prior period and payments of $69.5 million for income taxes on the gain on sale in the current period.

As of October 1, 2022, our debt included $535 million principal amount of convertible senior notes (the “2025 Notes”).

Net cash used in discontinued operations was zero during the three months ended April 1, 2023, compared to net cash used of $10.0 million during the three months ended April 2, 2022 related to income tax payments.

As of April 1, 2023, our debt included $535 million principal amount of convertible senior notes (the “2025 Notes”).

We also had an undrawn $400 million revolving credit facility.

We have an option to increase the size of the borrowing capacity of the revolving credit facility by up to the greater of an aggregate of $250 million and 100% of EBITDA, plus an amount that would not cause a secured leverage ratio to exceed 3.25 to 1.00, subject to certain conditions.

On January 2, 2022, we irrevocably elected cash settlement for the principal amount of the 2025 Notes.

On March 22, 2023, we issued a notice of redemption for the 2025 Notes, which will occur on June 20, 2023, for any of the 2025 Notes outstanding that have not been previously converted.

We have irrevocably elected cash settlement for the principal amount of the 2025 Notes and intend to settle any excess value with a combination of shares of our common stock and cash for fractional shares, if any.

Capital Requirements

Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, potential acquisitions of companies or technologies and the expansion of our sales and marketing activities.

We believe our existing cash, cash equivalents, investments, credit under our credit facility, and cash generated from operations are sufficient to meet our short-term and long-term capital requirements, although we could be required, or could elect, to seek additional funding prior to that time.

We believe our existing cash, cash equivalents, investments, credit under our credit facility, and cash generated from operations are sufficient to meet our short-term (i.e., over at least the next twelve months) and long-term capital requirements, although we could be required, or could elect, to seek additional funding prior to that time.

We may enter into acquisitions or strategic arrangements in the future which also could require us to seek additional equity or debt financing.

Critical Accounting Estimates

The preparation of financial statements and accompanying notes in conformity with U.S.

generally accepted accounting principles requires that we make estimates and assumptions that affect the amounts reported.

Changes in facts and circumstances could have a significant impact on the resulting estimated amounts included in the financial statements.

We believe the following critical accounting policies affect our more complex judgments and estimates.

Inventory valuation - We assess the recoverability of inventories through the application of a set of methods, assumptions and estimates.

In determining net realizable value, we write down inventory that may be slow moving or have some form of obsolescence, including inventory that has aged more than 12 months.

We also adjust the valuation of inventory when its manufacturing cost exceeds the estimated selling price less costs of completion, disposal and transportation.

We assess the potential for any unusual customer returns based on known quality or business issues and write-off inventory losses for scrap or non-saleable material.

Inventory not otherwise identified to be written down is compared to an assessment of our 12-month forecasted demand.

The result of this methodology is compared against the product life cycle and competitive situations in the marketplace to determine the appropriateness of the resulting inventory levels.

Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those that we project.

In the event that actual demand is lower or market conditions are worse than originally projected, additional inventory write-downs may be required.

Impairment of goodwill and other long-lived assets - We review long-lived assets which are held and used, including fixed assets and purchased intangible assets, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast.

If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.

We test our goodwill for impairment annually as of the first day of our fourth fiscal quarter and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired.

We assess goodwill for impairment by comparing the fair value of a reporting unit to its carrying amount.

In determining fair value, several valuation methodologies are allowed, although quoted market prices are the best evidence of fair value.

If the fair value of the reporting unit is less than its carrying amount, we recognize an impairment loss equal to that excess amount.

Acquired intangible assets - When we acquire a business, a portion of the purchase price is typically allocated to identifiable intangible assets, such as acquired technology and customer relationships.

Fair value of these assets is determined primarily using the income approach, which requires us to project future cash flows and apply an appropriate discount rate.

We amortize intangible assets with finite lives over their expected useful lives.

Our estimates are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable.

Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

Incorrect estimates could result in future impairment charges, and those charges could be material to our results of operations.

Revenue recognition — We recognize revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

In order to achieve this core principle, we apply a five-step process.

As part of this process, we analyze the performance obligations in a customer contract and estimate the variable consideration we expect to receive.

The evaluation of performance obligations requires that we identify the promised goods and services in the contract.

For contracts that contain more than one promised good and service, we then must determine whether the promises are capable of being distinct and if they are separately identifiable from other promises in the contract.

Variable consideration primarily includes sales made to distributors under agreements allowing certain rights of return, referred to as stock rotation, and credits issued to the distributor due to price protection.

We estimate variable consideration at the most likely amount to which we expect to be entitled.

We make these estimates based on available information, including recent sales activity and pricing data.

We apply a constraint to our variable consideration estimate which considers both the likelihood of a return and the amount of a potential price concession.

If our evaluation of performance obligations is incorrect, we may recognize revenue sooner or later than is appropriate.

If our estimates of variable consideration are inaccurate, we may recognize too much or too little revenue in a period.

We may adjust assumptions used to estimate consideration periodically based on analysis of prior estimates.

Stock-based compensation - We recognize the fair-value of stock-based compensation transactions in the Consolidated Statements of Income.

The fair value of our full-value stock awards (with the exception of market-based performance awards) equals the fair market value of our stock on the date of grant.

The fair value of our market-based performance awards is estimated at the date of grant using a Monte-Carlo simulation.

The fair value of our stock option and employee stock purchase plan grants is estimated at the date of grant using the Black-Scholes option pricing model.

In addition, we are required to estimate the expected forfeiture rate of our stock grants and only recognize the expense for those shares expected to vest.

If our actual experience differs significantly from the assumptions used to compute our stock-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little stock-based compensation cost.

See Note 10, Stock-Based Compensation , to the Condensed Consolidated Financial Statements for additional information.

Income taxes - We are required to calculate income taxes in each of the jurisdictions in which we operate.

This process involves calculating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes.

These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets.

We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

In assessing the need for a valuation allowance, we are required to estimate the amount of expected future taxable income.

Judgment is inherent in this process and differences between the estimated and actual taxable income could result in a material impact on our Consolidated Financial Statements.

We recognize liabilities for uncertain tax positions based on a two-step process.

The first step requires us to determine whether the weight of available evidence indicates that the tax position has met the threshold for recognition.

Therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes.

The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes.

We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity.

Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.

If additional taxes are assessed as a result of an audit or litigation, they could have a material effect on our income tax provision and net income in the period or periods for which that determination is made.

We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions.

These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax.

We believe adequate provisions for income taxes have been made for all periods.

Our critical accounting estimates are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Form 10-K for the fiscal year ended December 31, 2022.

There have been no material subsequent changes to our critical accounting estimates.

Quantitative and Qualitative Disclosures about Market Risk

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interest rates.

A 100 basis point decline in yield on our investment portfolio holdings as of October 1, 2022 would decrease our future annual interest income by approximately $12.5 million.

A 100 basis point decline in yield on our investment portfolio holdings as of April 1, 2023 would decrease our future annual interest income by approximately $10.5 million.

We believe that our investment policy, which defines the duration, concentration, and minimum credit quality of the allowable investments, meets our investment objectives.

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The interest rate on the credit facility consists of a variable-rate of interest and an applicable margin.

While we have drawn from the credit facility in the past, we have no borrowings as of October 1, 2022.

While we have drawn from the credit facility in the past, we have no borrowings as of April 1, 2023.

If we borrow from the credit facility in the future, we will again be exposed to interest rate fluctuations.

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Accordingly, gains and losses resulting from remeasuring transactions denominated in currencies other than U.S.

dollars are recorded in the Consolidated Statements of Income.

dollars are recorded in the Condensed Consolidated Statements of Income.

We use foreign currency forward contracts to manage exposure to foreign exchange risk.

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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-Q

Item 2. Management’s Discussion and Analysis