SEMTECH CORP (SMTC) FY 2023 MD&A

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and operating results should be read in conjunction with our Consolidated Financial Statements and related Notes included in Item 8 of this Annual Report on Form 10-K. See also “Special Note Regarding Forward Looking and Cautionary Statements and Summary Risk Factors” at the beginning of this Annual Report on Form 10-K.

Overview

We are a high-performance semiconductor, IoT systems and Cloud connectivity service provider and were incorporated in Delaware in 1960. We design, develop, manufacture and market a wide range of products for commercial applications, the majority of which are sold into the infrastructure, high-end consumer and industrial end markets. Infrastructure end market includes data centers, PON, base stations, optical networks, servers, carrier networks, switches and routers, cable modems, wireless LAN and other communication infrastructure equipment. High-end consumer end market includes smartphones, tablets, wearables, desktops, notebooks, and other handheld products, wireless charging, set-top boxes, digital televisions, monitors and displays, digital video recorders and other consumer equipment. Industrial end market includes IoT applications, analog and digital video broadcast equipment, video-over-IP solutions, automated meter reading, smart grid, wireless charging, medical, security systems, automotive, industrial and home automation and other industrial equipment. Our end customers for our silicon solutions are primarily OEMs that produce and sell technology solutions. Our IoT module, router, gateway and managed connectivity solutions ship to IoT device makers and enterprises to provide IoT connectivity to end devices.

We report results on the basis of 52 and 53 week periods and our fiscal year ends on the last Sunday in January. Fiscal years 2023, 2022 and 2021 consisted of 52 weeks, 52 weeks and 53 weeks, respectively. We have four operating segments—Signal Integrity, Advanced Protection and Sensing, IoT System, and IoT Connected Services—that represent four separate reportable segments. Historically, we had three operating segments—Signal Integrity, Wireless and Sensing, and Protection—that had been aggregated into two reportable segments identified as the High-Performance Analog Group, which was comprised of the Signal Integrity and Wireless and Sensing operating segments, and the System Protection Group, which was comprised of the Protection operating segment. In the fourth quarter of fiscal year 2023, as a result of organizational restructuring, the proximity sensing business and the power business were moved from the previous Wireless and Sensing operating segment into the newly formed Advanced Protection and Sensing operating segment, which also includes the Protection business. Following this organizational restructuring, we determined that Signal Integrity and the revised Wireless and Sensing operating segments were no longer economically similar and as a result we concluded that Signal Integrity should be separately reported as its own reportable segment. Also in the fourth quarter of fiscal year 2023, in conjunction with the acquisition of Sierra Wireless we formed two additional operating segments including the IoT System operating segment, which absorbed our revised Wireless and Sensing operating segment, and the IoT Connected Services operating segment. As a result of the reorganization and the Sierra Wireless Acquisition, we have four reportable segments. All prior year information in the tables below has been revised retrospectively to reflect the change to our reportable segments. See Note 16, Segment Information, to our Consolidated Financial Statements for segment information.

Despite various macroeconomic challenges, we remained focused on furthering our role as a leading provider of disruptive platforms that enable our customers to deliver solutions to create a smarter planet. We continued to invest in secular trends that enable a smarter, more sustainable planet; enable higher bandwidth; and enable greater mobility. As a result, we expect these markets and our associated products’ sales to grow rapidly over the next several years. The increasing adoption of our LoRa® technology for low power wide-area networks is providing connectivity solutions that enable IoT networks to make a smarter, more connected planet. Additionally, our portfolio of optical connectivity solutions continue to address the demand for greater bandwidth and higher performance, while using less power by our global hyper-scale data center customers. Additionally, the unexpected pivot to online learning and work from home during the pandemic exposed the fragile nature of many global networks that struggled under the spike in demand. This has driven infrastructure suppliers around the world to accelerate their investments in high speed connectivity using 5G wireless and PON technology where we are an industry leader. The trend towards adoption of finer silicon geometries has accelerated across all categories of end systems, making them increasingly vulnerable to electrical and electromagnetic threats. Our protection solutions, which enable the highest levels of system performance, have found increased adoption across the board, driven by the need to maintain product functionality despite the challenging threat environment (electrical and electromagnetic), and increased system sensitivity to threats due to adoption of finer silicon geometries for implementation of system functions. Finally, the increasing demand for smaller, lower-powered higher performance mobile platforms with more enjoyable organic light-emitting diode displays has benefited our protection and proximity sensing solutions that protect these mobile devices and their users from dangerous radio frequency signals.

During the fiscal year ended January 29, 2023, we also maintained our strategy of smaller, targeted investments focused mainly on minority positions in support of the developing LoRa ecosystem and the many new IoT solutions we are introducing. In addition to these strategic investments, we took further actions to help ensure the supply of products from our vendors and suppliers. We believe our investments in fiscal year 2023 position us well to support our expectations of future growth.

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Acquisition of Sierra Wireless, Inc.

On January 12, 2023, we, through one of our wholly-owned subsidiaries, completed the Sierra Wireless Acquisition pursuant to the Arrangement Agreement. Pursuant to terms and conditions of the Arrangement Agreement and Plan of Arrangement, at the effective time of the Sierra Wireless Acquisition, each common share of Sierra Wireless that was issued and outstanding immediately prior to the effective time was transferred to the Purchaser in consideration for the right to receive $31.00 per share of Sierra Wireless' common shares in an all-cash transaction representing a total purchase consideration of approximately $1.3 billion. We funded the cash consideration with a combination of cash on hand and $895.0 million of capital from term loans as described in Note 10, Long-Term Debt, to our Consolidated Financial Statements.

The transaction was accounted for as a business combination. We are still in the process of determining the final purchase price allocation. For more information, see Note 3, Acquisition and Divestiture, to our Consolidated Financial Statements.

Divestiture

On May 3, 2022, we completed the divestiture of the Disposal Group to Micross Components, Inc. for $26.2 million, net of cash disposed, in an all-cash transaction. For additional information on the divestiture, see Note 3, Acquisition and Divestiture, to our Consolidated Financial Statements.

Credit Agreement

On September 26, 2022, we entered into the third amendment and restatement (the "Restatement Agreement") to that certain amended and restated credit agreement, dated as of November 7, 2019, by and among us, with certain of our domestic subsidiaries as guarantors, the lender party thereto and HSBC Bank USA, National Association, as administrative agent, swing line lender and letter of credit issuer (as amended or otherwise modified from time to time, the “Credit Agreement”), which substantially concurrently with the consummation of the Sierra Wireless Acquisition, among other things, (i) extended the maturity date of $405.0 million of the $600.0 million in aggregate principal amount of revolving commitments thereunder from November 7, 2024 to the fifth anniversary of the Acquisition Closing Date (subject to, in certain circumstances, an earlier springing maturity), (ii) provided for incurrence by us on the Acquisition Closing Date of a new five-year term loan facility in an aggregate principal amount of $895.0 million (the "Term Loan Facility" and the loans thereunder, the "Term Loans"), intended to be used to fund a portion of the cash consideration for the Sierra Wireless Acquisition and related fees and expenses, (iii) provided for JPMorgan Chase Bank, N.A. to succeed HSBC Bank USA, National Association as administrative agent and collateral agent under the Credit Agreement on the Acquisition Closing Date, (iv) modified the maximum consolidated leverage covenant as set forth in the Restatement Agreement and (v) made certain other changes as set forth in the Restatement Agreement, including changes consequential to the incorporation of the Term Loan Facility. For additional information on the Restatement Agreement and Credit Agreement, see Note 10, Long-Term Debt, to our Consolidated Financial Statements.

On February 24, 2023, we entered into a first amendment to the Restatement Agreement to make certain modifications to the financial covenants in the Credit Agreement, as described in further detail under “Liquidity and Capital Resources” below.

Term Loans

On January 12, 2023, we borrowed $895.0 million under the Term Loan Facility in order to fund a portion of the consideration for the Sierra Wireless Acquisition. The Term Loans will mature on January 12, 2028. For additional information on the Term Loans, see Note 10, Long-Term Debt, to our Consolidated Financial Statements.

Convertible Senior Notes

On October 12, 2022 and October 21, 2022, we issued and sold $300 million and $19.5 million, respectively, in aggregate principal amount of our 1.625% Convertible Senior Notes due 2027 (the “Notes”) in a private placement. The Notes were issued pursuant to an indenture, dated October 12, 2022, by and among us, the Subsidiary Guarantors (as defined below) party thereto and U.S. Bank Trust Company, National Association, as trustee (the "Indenture"). The Notes are jointly and severally and fully and unconditionally guaranteed by each of our current and future direct and indirect wholly-owned domestic subsidiaries that guarantee our borrowings under the Credit Agreement (the "Subsidiary Guarantors"). The Notes bear interest at a rate of 1.625% per year, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on May 1, 2023. The Notes will mature on November 1, 2027, unless earlier converted, redeemed or repurchased. The Notes were initially issued pursuant to an exemption from the registration requirements of the Securities Act, as amended (the “Securities Act”), afforded by Section 4(a)(2) of the Securities Act. For additional information on the Notes, see Note 10, Long-Term Debt, to our Consolidated Financial Statements.

Debt Commitment Letter

In connection with the entry into the Arrangement Agreement, we entered into a commitment letter, dated as of August 2, 2022 (the “Commitment Letter”) with JPMorgan Chase Bank, N.A. (“JPM”), pursuant to which JPM committed to provide (a) a backstop of certain amendments to our then-existing Credit Agreement (defined below) and (b) a 364-day bridge loan facility in

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the aggregate principal amount of $1.2 billion (the "Bridge Commitment"), subject to certain mandatory commitment reductions customary for a bridge loan facility. During the third quarter of fiscal year 2023, the amendments and restatement of the Credit Agreement and the issuance of the Notes occurred to replace the backstop commitment and the Bridge Commitment, each of which has now terminated. For additional information on the Commitment Letter, see Note 10, Long-Term Debt to our Consolidated Financial Statements.

Impact of COVID-19

The COVID-19 pandemic has significantly affected health and economic conditions throughout the U.S. and the rest of the world including Asia, where a significant percentage of our customers, suppliers, third party foundries and subcontractors are located. As a result of the pandemic, certain of our facilities and the third-party foundries and assembly and test contractors to which we outsource our manufacturing functions, have had to periodically reduce or suspend operations. The disruption experienced during such closures has resulted in reduced production of our products, delays for delivery of our products to our customers, and reduced ability to receive supplies, which have had and may continue to have, individually and in the aggregate, an adverse effect on our results.

Inventory levels decreased during fiscal year 2023 as a result of the decrease in demand. We expect to see supply constraints ease for some products in fiscal year 2024 due to changes in anticipated demand and other macroeconomic conditions. We will continue to take appropriate actions to align inventory levels with current macroeconomic conditions and customer demand profiles. In addition, the prices to obtain raw materials and convert them into the necessary inventory have increased in certain cases due to inflationary pressures and supply chain shortages and prices may continue to increase.

Factors Affecting Our Performance

Most of our sales to customers are made on the basis of individual customer purchase orders. Many customers include cancellation provisions in their purchase orders. Sales made directly to customers during fiscal years 2023, 2022 and 2021 were approximately 15%, 13% and 18% of net sales, respectively. The remaining 85%, 87% and 82% of net sales, respectively, were made through independent distributors.

Our business relies on foreign-based entities. Many of our third-party subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries or territories including Taiwan, China, Vietnam and Malaysia. Foreign sales for fiscal years 2023, 2022 and 2021 constituted approximately 87%, 90% and 90%, respectively, of our net sales. Approximately 72%, 79% and 80% of net sales in fiscal years 2023, 2022 and 2021, respectively, were to customers located in the Asia-Pacific region. The remaining foreign sales were primarily to customers in Europe and North America. Doing business in foreign locations also subjects us to export restrictions and trade laws, which may limit our ability to sell to certain customers.

We use several metrics as indicators of future potential growth. The indicators that we believe best correlate to potential future sales growth are design wins and new product releases. There are many factors that may cause a design win or new product release to not result in sales, including a customer decision not to go to system production, a change in a customer’s perspective regarding a product’s value or a customer’s product failing in the end market. As a result, although a design win or new product introduction is an important step towards generating future sales, it does not inevitably result in us being awarded business or receiving a purchase commitment.

Inflationary factors have not had a significant effect on our performance over the past several years. A significant increase in inflation would affect our future performance if we were unable to pass these higher costs on to our customers.

Revenue

We derive our revenue primarily from the sale of our products into various end markets. Revenue is recognized when control of these products is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for these products. Control is generally transferred when products are shipped and, to a lesser extent, when the products are delivered. Recovery of costs associated with product design and engineering services are recognized during the period in which services are performed and are reported as a reduction to product development and engineering expense. Historically, these recoveries have not exceeded the cost of the related development efforts. We include revenue related to granted technology licenses as part of "Net sales" in the Statements of Income. Historically, revenue from these arrangements has not been significant though it is part of our recurring ordinary business.

We determine revenue recognition through the following five steps:

•Identification of the contract, or contracts, with a customer

•Identification of the performance obligations in the contract

•Determination of the transaction price

•Allocation of the transaction price to the performance obligations in the contract

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•Recognition of revenue when, or as, performance obligations are satisfied

We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

Our revenue contracts generally represent a single performance obligation to sell our products to trade customers. Net sales reflect the transaction prices for contracts, which include units shipped at selling prices reduced by variable consideration. Determination of variable consideration requires judgment by us. Variable consideration includes expected sales returns and other price adjustments. Variable consideration is estimated using the expected value method considering all reasonably available information, including our historical experience and our current expectations, and is reflected in the transaction price when sales are recorded. Sales returns are generally accepted at our discretion or from distributors with such rights. Our contracts with trade customers do not have significant financing components or non-cash consideration. We record net sales excluding taxes collected on our sales to our trade customers.

We provide an assurance type warranty, which is typically not sold separately and does not represent a separate performance obligation. Our payment terms are generally aligned with shipping terms.

Gross Profit

Gross profit is equal to our net sales less our cost of sales. Our cost of sales includes materials, depreciation on fixed assets used in the manufacturing process, shipping costs, direct labor and overhead. The majority of our manufacturing is outsourced, resulting in relatively low fixed manufacturing costs and variable costs that highly correlate with volume. We determine the cost of inventory by the first-in, first-out method.

Operating Costs and expenses, net

Our operating costs and expenses generally consist of selling, general and administrative, product development and engineering costs, costs associated with acquisitions, restructuring charges, and other operating related charges.

Results of Operations

A discussion of our results of operations for the fiscal years ended January 29, 2023 and January 30, 2022 and year-over-year comparisons between these fiscal years appears below. In the fourth quarter of fiscal year 2023, we made certain changes in our reportable segments based on the Sierra Wireless Acquisition and our organizational restructuring (see Note 16, Segment Information, to our Consolidated Financial Statements for segment information). With the exception of net sales and gross profit, which are discussed below to reflect the changes to our reportable segments, a discussion of our results of operations for the fiscal year ended January 31, 2021 and year-over-year comparisons between fiscal years 2022 and 2021 have been omitted from this Annual Report on Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended January 30, 2022, filed with the SEC on March 16, 2022 and is incorporated herein by reference.

Reclassification

In fiscal year 2023, as a result of the adoption of a new accounting policy applied retrospectively, we reclassified $4.9 million and $7.7 million of amortization of acquired technology intangible assets for fiscal years 2022 and 2021, respectively, from "Intangible amortization" within "Total operating costs and expenses, net" to "Amortization of acquired technology" within "Total cost of sales" in the Statements of Income, which also had the impact of reducing gross profit by the same amounts. This reclassification did not impact our operating income, net income or earnings per share for any historical periods and also did not impact our Balance Sheets or Statements of Cash Flows.

Net Sales

Fiscal Year 2023 Compared with Fiscal Year 2022

The following table summarizes our net sales by major end market:

Net sales for fiscal year 2023 were $756.5 million, an increase of 2% compared to $740.9 million for fiscal year 2022. Net sales from our industrial end market increased $54.8 million versus the prior year primarily due to an approximately $53 million

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increase in LoRa-enabled product sales led by an increase in pico gateways. Net sales from our infrastructure end market increased $22.8 million driven by an approximately $37 million increase in PON sales, partially offset by an approximately $11 million decline in data center demand and an approximately $5 million decrease in wireless infrastructure sales. Net sales from our high-end consumer end market decreased $62.0 million primarily driven by an approximately $47 million decrease in our proximity sensing product sales, including smartphones and an approximately $23 million decrease in Protection product sales, including wearables, mobile computers and smartphones, partially offset by an approximately $7 million increase in industrial automation and automotive sales.

Based on booking trends and backlog entering the quarter, we estimate net sales for the first quarter of fiscal year 2024 to be between $230.0 million and $240.0 million. The range of guidance reflects continued uncertainty regarding macro-related events.

The following table summarizes our net sales by reportable segment:

Net sales from our Signal Integrity Products Group increased $13.0 million in fiscal year 2023 versus fiscal year 2022 primarily due to an approximately $37 million increase in PON sales, driven by higher 10G PON sales, partially offset by an approximately $11 million decline in data center demand, an approximately $7 million decrease in broadcast product sales and an approximately $5 million decrease in wireless infrastructure sales. Net sales from our Advanced Protection and Sensing Group decreased $70.0 million in fiscal year 2023 versus fiscal year 2022 primarily driven by an approximately $47 million decrease in proximity sensing sales and an approximately $23 million decrease in consumer product sales, including wearables, mobile computers and smartphones. Net sales from our IoT System Products Group increased $67.5 million in fiscal year 2023 versus fiscal year 2022 primarily due to an approximately $53 million increase in LoRa-enabled product sales led by an increase in pico gateways and an approximately $6 million increase in module sales. Net sales from our IoT Connected Services Group increased $5.2 million in fiscal year 2023 versus fiscal year 2022 primarily due to approximately $5 million in managed connectivity sales.

Fiscal Year 2022 Compared with Fiscal Year 2021

Net sales for fiscal year 2022 were $740.9 million, an increase of 24% compared to $595.1 million for fiscal year 2021, which had benefited from an additional week. We experienced strong demand across all three of our end markets compared to the prior year when our net sales were adversely impacted by delays in certain shipments of our products due to COVID-19 related shutdowns, including certain subcontractors in Malaysia. Net sales from our industrial end market increased $68.8 million versus the prior year primarily due to an approximately $46 million increase in LoRa-enabled product sales led by an increase in pico gateways and an approximately $19 million increase in industrial automation and automotive sales. Net sales from our high-end consumer end market increased $58.0 million primarily driven by an approximately $23 million increase in Protection product sales, including wearables, mobile computers and smartphones, and an approximately $22 million increase in our proximity sensing product sales, including smartphones. Net sales from our infrastructure end market increased $18.9 million driven by an approximately $36 million increase in PON sales, including 10G PON, partially offset by an approximately $17 million decline in data center demand.

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The following table summarizes our net sales by reportable segment:

Net sales from our Signal Integrity Products Group increased $35.5 million in fiscal year 2022 versus fiscal year 2021 primarily due to an approximately $36 million increase in PON sales, including 10G PON, an approximately $15 million increase in broadcast product sales, partially offset by an approximately $17 million decline in data center demand. Net sales from our Advanced Protection and Sensing Group increased $63.8 million in fiscal year 2022 versus fiscal year 2021 primarily driven by an approximately $23 million increase in consumer product sales, including wearables, mobile computers and smartphones, an approximately $22 million increase in proximity sensing sales and an approximately $19 million increase in industrial automation and automotive sales. Net sales from our IoT System Products Group increased $46.4 million in fiscal year 2023 versus fiscal year 2022 primarily due to an approximately $46 million increase in LoRa-enabled product sales led by an increase in pico gateways.

Gross Profit

Fiscal Year 2023 Compared with Fiscal Year 2022

The following table summarizes our gross profit and gross margin by reportable segment:

In fiscal year 2023, gross profit increased to $478.6 million from $461.1 million in fiscal year 2022 as a result of higher sales. This increase included a $42.4 million increase from our IoT System Products Group primarily driven by higher LoRa-enabled sales, including pico gateways, an $11.5 million increase from our Signal Integrity Products Group primarily driven by higher PON sales, including 10G PON, a $2.5 million increase from our IoT Connected Services Group, offset by a $37.9 million decrease from our Advanced Protection and Sensing Group primarily driven by lower consumer sales.

Our gross margin was 63.3% in fiscal year 2023, compared to 62.2% in fiscal year 2022. Gross margin in our Signal Integrity Products Group was 69.6% in fiscal year 2023, compared to 68.8% in fiscal year 2022 primarily driven by higher PON sales, including 10G PON. Gross margin in our Advanced Protection and Sensing Group was 53.0% in fiscal year 2023, compared to 53.3% in fiscal year 2022 as a result of lower consumer sales. Gross margin in our IoT System Products Group was 70.8% in fiscal year 2023, compared to 74.6% in fiscal year 2022 due to LoRa inventory reserves. Gross margin in our IoT Connected Services Group was 47.9% in fiscal year 2023.

The majority of our manufacturing is outsourced, resulting in relatively low fixed manufacturing costs and variable costs that highly correlate with volume. We expect overall gross profit for fiscal year 2024 to benefit from a favorable mix of high margin products.

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Fiscal Year 2022 Compared with Fiscal Year 2021

The following table summarizes our gross profit and gross margin by reportable segment:

In fiscal year 2022, gross profit increased to $461.1 million from $355.9 million in fiscal year 2021 as a result of higher sales. This increase included a $28.2 million increase from our Signal Integrity Products Group, a $36.0 million increase from our Advanced Protection and Sensing Group and a $40.7 million increase from our IoT System Products Group, all of which experienced higher demand and implemented price increases to offset higher manufacturing costs during fiscal year 2022.

Our gross margin was 62.2% in fiscal year 2022, compared to 59.8% in fiscal year 2021. Gross margin in our Signal Integrity Products Group was 68.8% in fiscal year 2022, compared to 67.3% in fiscal year 2021. Gross margin in our Advanced Protection and Sensing Group was 53.3% in fiscal year 2022, compared to 52.4% in fiscal year 2021. Gross margin in our IoT System Products Group was 74.6% in fiscal year 2022, compared to 68.2% in fiscal year 2021. Gross margins in all reportable segments reflected a more favorable product mix.

Operating Costs and Expenses, net

Selling, General & Administrative Expenses

SG&A expenses for fiscal year 2023 increased by $67.6 million primarily driven by approximately $34 million of share-based compensation acceleration expense, approximately $29 million of other transaction costs related to the Sierra Wireless Acquisition and approximately $11 million in restructuring expense, partially offset by an $11 million decrease in share-based compensation caused by the impact of the lower closing stock price at year-end on the cash-settled awards.

Product Development and Engineering Expenses

Product development and engineering expenses for fiscal years 2023 and 2022 were $167.5 million and $147.9 million, respectively, or an increase of 13%. This increase was primarily driven by $11 million of share-based compensation acceleration expense. New product introduction expenses, including costs related to Sierra Wireless during the post-acquisition period, also contributed to the increase. The levels of product development and engineering expenses reported in a fiscal period can be significantly impacted, and therefore experience period-over-period volatility, by the number of new product tape-outs and by the timing of recoveries from non-recurring engineering services, which are typically recorded as a reduction to product development and engineering expense.

Intangible Amortization

Intangible amortization for fiscal year 2023 increased by $0.8 million due to intangibles acquired in the Sierra Wireless Acquisition related to customer relationships and trade name. Amortization of acquired technology intangibles is reflected in cost of sales.

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Gain on Sale of Business

Gain on sale of business was $18.3 million in fiscal year 2023, resulting from our divestiture of the Disposal Group in May 2022.

Changes in the Fair Value of Contingent Earn-out Obligations

The change in the fair value of contingent earn-out obligations in fiscal year 2022 reflects the difference between the final earn-out targets achieved for Cycleo SAS and the final earn-out payments made.

Interest Expense

Interest expense was $17.6 million and $5.1 million for fiscal years 2023 and 2022, respectively. The $12.6 million increase was primarily due to a $7.3 million debt commitment fee and additional debt instruments entered into during fiscal year 2023 related to financing for the Sierra Wireless Acquisition.

Investment Impairments and Credit Loss Reserves

In fiscal year 2023, investment impairments and credit loss reserves totaled a loss of $1.2 million as we had $0.3 million of recoveries on our credit loss reserves for our available-for-sale ("AFS") debt securities, consisting of our convertible debt investments in privately-held companies and recorded a $1.5 million impairment on one of our non-marketable equity investments. In fiscal year 2022, investment impairments and credit loss reserves totaled a loss of $1.3 million as we increased our credit loss reserves by $1.1 million for our AFS debt securities consisting of our convertible debt investments in privately-held companies and recorded an impairment on one of our non-marketable equity investments totaling $0.2 million.

Provision for Income Taxes

We recorded income tax expense of $17.3 million for fiscal year 2023 compared to income tax expense of $15.5 million for fiscal year 2022. The effective tax rates for fiscal years 2023 and 2022 were provision rates of 22.0% and 11.0%, respectively. Our effective tax rate for fiscal year 2023 differs from the statutory federal income tax rate of 21% primarily due to our regional mix of income, impact of global intangible low-taxed income ("GILTI") and research and development ("R&D") tax credits. The Tax Act requires R&D costs incurred for tax years beginning after December 31, 2021 to be capitalized and amortized ratably over five or fifteen years for tax purposes, depending on where the research activities are conducted. We have elected to treat GILTI as a period cost and the additional capitalization of R&D costs within GILTI increases our provision for income taxes.

We receive a tax benefit from a tax holiday that was granted in Switzerland. The tax holiday commenced on January 30, 2017, and was effective for five years (the “Initial Term”). Since we met certain staffing targets, the holiday has been extended for an additional five years. The maximum benefit under this tax holiday is CHF 500.0 million of cumulative after tax profit, which equates to a maximum potential tax savings of CHF 44.0 million. Once the extended term of the tax holiday expires or we achieve the maximum benefit, our effective tax rate could be negatively impacted if we are unable to negotiate an extension or expansion of the tax holiday. The Swiss Tax Reform that was enacted during fiscal year 2020 reduces the Swiss Cantonal tax rate, which further increases the benefit of our Tax Holiday.

As a global organization, we are subject to audit by taxing authorities in various jurisdictions. To the extent that an audit, or the closure of a statute of limitations results in adjusting our reserves for uncertain tax positions, our effective tax rate could experience extreme volatility since any adjustment would be recorded as a discrete item in the period of adjustment.

For further information on the effective tax rate and the Tax Act’s impact, see Note 12, Income Taxes, to our Consolidated Financial Statements.

Liquidity and Capital Resources

Our capital requirements depend on a variety of factors including, but not limited to, the rate of increase or decrease in our existing business base; the success, timing and amount of investment required to bring new products to market; sales growth or decline; potential acquisitions; the general economic environment in which we operate; and our ability to generate cash flow from operations.

We believe that our cash on hand, cash available from future operations and available borrowing capacity under our Revolving Credit Facility (as defined below) are sufficient to meet liquidity requirements for at least the next 12 months, including funds needed for our material cash requirements. As of January 29, 2023, we had $235.5 million in cash and cash equivalents and $450.0 million of undrawn capacity on our Revolving Credit Facility. Over the longer-term, we believe our strong cash-generating business model will continue to provide adequate liquidity to fund our normal operations, which have minimal capital intensity. To the extent that we enter into acquisitions or strategic partnerships, we may be required to raise additional capital through debt issuances or equity offerings. While we have not had issues securing favorable financing historically, there is no assurance that we will be able to refinance or secure additional capital at favorable terms, or at all in the future.

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A meaningful portion of our capital resources, and the liquidity they represent, are held by our foreign subsidiaries. As of January 29, 2023, our foreign subsidiaries held approximately $151.4 million of cash and cash equivalents, compared to $221.9 million at January 30, 2022. Our liquidity may be impacted by fluctuating exchange rates. For additional information on exchange rates, see "Item 7A - Quantitative and Qualitative Disclosures About Market Risk."

In connection with the enactment of the Tax Act, all historic and current foreign earnings are taxed in the U.S. Depending on the jurisdiction, these foreign earnings are potentially subject to a withholding tax, if repatriated. As of January 29, 2023, our historical undistributed earnings of our foreign subsidiaries are intended to be permanently reinvested outside of the U.S. With the enactment of the Tax Act, all post-1986 previously unremitted earnings for which no U.S. deferred tax liability had been accrued were subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, we have determined that none of our current foreign earnings will be permanently reinvested. If we needed to remit all or a portion of our historical undistributed earnings to the U.S. for investment in our domestic operations, any such remittance could result in increased tax liabilities and a higher effective tax rate. Determination of the amount of the unrecognized deferred tax liability on these unremitted earnings is not practicable.

We expect our future cash uses will be for capital expenditures, repurchases of our common stock, debt repayment and potentially, acquisitions and other investments that support achievement of our business strategies. We expect to fund those cash requirements through our cash from operations and borrowings against our Revolving Credit Facility.

Sources of Liquidity

Operating Cash Flows

Operating cash flows were $126.7 million or 16.7% of net sales in fiscal year 2023 and $203.1 million or 27.4% of net sales in fiscal year 2022. Our consistently solid profitability and operating cash flow are driven by our ability to value price for the differentiated technology that we provide, as well as our fabless business model, which is highly flexible to changes in customer demand.

Credit Agreement

On November 7, 2019, we, with certain of our domestic subsidiaries as guarantors, entered into the Credit Agreement with the lenders party thereto and HSBC Bank USA, National Association, as administrative agent, swing line lender and letter of credit issuer. Following the effectiveness of the Restatement Agreement, the revolving credit facility (the "Revolving Credit Facility") is $600.0 million, of which $195.0 million matures on November 7, 2024 and $405.0 million matures on January 12, 2028.

In fiscal year 2023, we borrowed $10.0 million and repaid $33.0 million on our Revolving Credit Facility. In fiscal year 2022, we borrowed $20.0 million and repaid $28.0 million on our Revolving Credit Facility. As of January 29, 2023, we had $150.0 million outstanding under our Revolving Credit Facility and $450.0 million of undrawn borrowing capacity thereunder, as well as Term Loans outstanding under the Term Loan Facility of $895.0 million.

On August 11, 2021, we entered into an amendment to the Credit Agreement in order to, among other things, (i) provide for contractual fallback language for LIBOR replacement to reflect the Alternative Reference Rates Committee hardwired approach and (ii) incorporate certain provisions that clarify the rights of the administrative agent to recover from lenders or other secured parties erroneous payments made to such lenders or secured parties.

On September 1, 2022, we entered into the second amendment to the Credit Agreement in order to, among other things, (i) permit the consummation of, and certain transactions in connection with the Sierra Wireless Acquisition, (ii) revise the financial maintenance covenant by increasing the maximum consolidated leverage ratio permitted for the six successive fiscal quarters following consummation of the Sierra Wireless Acquisition, (iii) permit the incurrence of up to $1.2 billion (plus the amount of fees and expenses related to the Sierra Wireless Acquisition) in additional secured debt in connection with the Sierra Wireless Acquisition, (iv) provide for limited conditions precedent in the event of a borrowing to finance the Sierra Wireless Acquisition and (v) make certain other changes as set forth in the amendment.

On September 26, 2022, we entered into the Restatement Agreement, which substantially concurrently with the completion of the Sierra Wireless Acquisition on January 12, 2023, among other things, (i) extended the maturity date of $405.0 million of the $600.0 million in aggregate principal amount of revolving commitments thereunder from November 7, 2024 to January 12, 2028, (ii) provided for incurrence by us on January 12, 2023 of the Term Loan Facility in an aggregate principal amount of $895.0 million, which was used to fund a portion of the cash consideration for the Sierra Wireless Acquisition, (iii) provided for JPMorgan Chase Bank, N.A. to succeed HSBC Bank USA, National Association as administrative agent and collateral agent under the Credit Agreement on January 12, 2023, (iv) modified the maximum consolidated leverage covenant as set forth in the Restatement Agreement, (v) replaced LIBOR with adjusted term SOFR and (vi) made certain other changes as set forth in the Restatement Agreement, including changes consequential to the incorporation of the Term Loan Facility.

On January 12, 2023, we entered into an interest rate swap agreement with a five-year term to hedge the variability of interest payments on the first $450.0 million of debt outstanding on the Term Loans at a Term SOFR rate of 3.44%, plus a variable margin and spread based on our consolidated leverage ratio.

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On February 24, 2023, we entered into a first amendment (the “First Amendment”) to the Restatement Agreement, in order to, among other things: (i) increase the maximum consolidated leverage ratio covenant for certain test periods as set forth therein, (ii) reduce the minimum consolidated interest coverage ratio covenant for certain test periods as set forth therein, (iii) increase the interest rate margin applicable to loans under the Credit Agreement during the covenant relief period as set forth therein and (iv) make certain other changes as set forth therein.

In fiscal year 2021, we entered into an interest rate swap agreement with a three-year term to hedge the variability of interest payments on the first $150.0 million of debt outstanding under the Revolving Credit Facility. Interest payments on $150.0 million of our debt outstanding under the Revolving Credit Facility were fixed at a LIBOR-referenced rate of 0.73%, plus a variable margin and spread based on our consolidated leverage ratio. Any future borrowings on our Revolving Credit Facility will remain subject to a floating rate.

Following the effectiveness of the Restatement Agreement, interest on loans made under the Credit Agreement in U.S. Dollars accrues, at our option, at a rate per annum equal to (1) the Base Rate (as defined below) plus a margin ranging from 0.25% to 1.25% depending upon our consolidated leverage ratio (except that, during the period that financial covenant relief pursuant to the First Amendment is in effect, the margin is deemed to be 1.50% per annum) or (2) Adjusted Term SOFR (as defined in the Credit Agreement, including certain credit spread adjustments) for an interest period to be selected by us plus a margin ranging from 1.25% to 2.25% depending upon our consolidated leverage ratio (except that, during the period that financial covenant relief pursuant to the First Amendment is in effect, the margin is deemed to be 2.50% per annum) (such margin, the "Applicable Margin"). The "Base Rate" is equal to a fluctuating rate equal to the highest of (a) the Prime Rate (as defined in the Credit Agreement), (b) 0.50% above the NYFRB Rate (as defined in the Credit Agreement) and (c) one-month Adjusted Term SOFR (as defined in the Credit Agreement) plus 1.00%. Interest on loans made under the Revolving Credit Facility in Alternative Currencies (as defined in the Credit Agreement) accrues at a rate per annum equal to a customary benchmark rate (including, in certain cases, credit spread adjustments) plus the Applicable Margin.

All of our obligations under the Credit Agreement are unconditionally guaranteed by all of our direct and indirect domestic subsidiaries, other than certain excluded subsidiaries, including, but not limited to, any domestic subsidiary the primary assets of which consist of equity or debt of non-U.S. subsidiaries, certain immaterial non-wholly-owned domestic subsidiaries and subsidiaries that are prohibited from providing a guarantee under applicable law or that would require governmental approval to provide such guarantee. The Company and the guarantors have also pledged substantially all of their assets to secure their obligations under the Credit Agreement.

No amortization is required with respect to the revolving loans. The Term Loans amortize in equal quarterly installments of 1.25% of the original principal amount thereof, with the balance due at maturity. We may voluntarily prepay borrowings at any time and from time to time, without premium or penalty, other than customary "breakage costs" in certain circumstances.

The Credit Agreement contains customary covenants, including limitations on our ability to, among other things, incur indebtedness, create liens on assets, engage in certain fundamental corporate changes, make investments, repurchase stock, pay dividends or make similar distributions, engage in certain affiliate transactions, or enter into agreements that restrict our ability to create liens, pay dividends or make loan repayments. In addition, we must comply with financial covenants, including:

•maintaining a maximum consolidated leverage ratio, determined as of the last day of each fiscal quarter, of (i) 4.75 to 1.00, for the fiscal quarter ending on or around April 30, 2023, (ii) 5.75 to 1.00, unless the financial covenant relief period (the “Relief Period”) has been terminated, in which case 4.75 to 1.00, for the fiscal quarter ending on or around July 31, 2023, (iii) 5.75 to 1.00, unless the Relief Period has been terminated, in which case 4.75 to 1.00, for the fiscal quarter ending on or around October 31, 2023, (iv) 5.50 to 1.00, unless the Relief Period has been terminated, in which case 4.75 to 1.00, for the fiscal quarter ending on or around January 31, 2024, (v) 4.75 to 1.00, unless the Relief Period has been terminated, in which case 4.50 to 1.00, for the fiscal quarter ending on or around April 30, 2024, (vi) 4.50 to 1.00, for the fiscal quarter ending on or around July 31, 2024, and (vii) 3.75 to 1.00, for the fiscal quarter ending on or around October 31, 2024 and each fiscal quarter thereafter subject to increase to 4.25 to 1.00 for the four full consecutive fiscal quarters ending on or after the date of consummation of a permitted acquisition that constitutes a "Material Acquisition" under the Credit Agreement, subject to the satisfaction of certain conditions; and

•maintaining a minimum consolidated interest expense coverage ratio, determined as of the last day of each fiscal quarter, of (i) 2.50 to 1.00, unless the Relief Period has been terminated, in which case 3.50 to 1.00, for the fiscal quarter ending on or around April 30, 2023, (ii) 2.25 to 1.00, unless the Relief Period has been terminated, in which case 3.50 to 1.00, for the fiscal quarter ending on or around July 31, 2023, (iii) 2.00 to 1.00, unless the Relief Period has been terminated, in which case 3.50 to 1.00, for the fiscal quarter ending on or around October 31, 2023, (iv) 2.25 to 1.00, unless the Relief Period has been terminated, in which case 3.50 to 1.00, for the fiscal quarter ending on or around January 31, 2024, (v) 2.50 to 1.00, unless the Relief Period has been terminated, in which case 3.50:1.00, for the fiscal quarter ending on or around April 30, 2024, and (vi) 3.50 to 1.00, for the fiscal quarter ending on or around July 31, 2024 and each fiscal quarter thereafter.

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The Credit Agreement also contains customary provisions pertaining to events of default. If any event of default occurs, the obligations under the Credit Agreement may be declared due and payable, terminated upon written notice to us and existing letters of credit may be required to be cash collateralized.

As of January 29, 2023, we were in compliance with the financial covenants in our Credit Agreement.

As reported elsewhere, on March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC, as receiver, and SVB was subsequently transferred into a new entity, Silicon Valley Bridge Bank, N.A. On March 12, 2023, the U.S. Department of the Treasury, the Federal Reserve, and the FDIC jointly released a statement that depositors at SVB would have access to their funds, even those in excess of the standard FDIC insurance limits, under a systemic risk exception. Such parties also announced, among other items, that Silicon Valley Bridge Bank has assumed the obligations and commitments of former SVB, commitments to advance under existing credit agreements will be honored in accordance with and pursuant to the terms of such credit agreements and any other duties or roles under existing credit agreements will be performed by Silicon Valley Bridge Bank in accordance with and pursuant to the terms of such credit facilities. SVB is a lender under the Term Loan Facility, which has now been assumed by Silicon Valley Bridge Bank. We currently owe SVB approximately $42.9 million under the Term Loan Facility, which is an obligation we believe is unaffected by the closure of SVB.

While we continue to monitor the circumstances surrounding SVB, we do not expect the closure to have a material adverse effect on our liquidity. However, there can be no assurances that the closure of SVB, or any other financial institution, or any related impacts across the financial services industry will not adversely affect our ability to access the additional availability under the Credit Facility.

Term Loans

As discussed above, in connection with the Restatement Agreement, we borrowed $895.0 million under the Term Loan Facility on January 12, 2023 in order to fund a portion of the consideration for the Sierra Wireless Acquisition. The Term Loans will mature on January 12, 2028. Interest on the Term Loans is determined in the same manner as for the Revolving Credit Facility. For additional information on the Term Loans, see Note 10, Long-Term Debt, to our Consolidated Financial Statements.

Convertible Senior Notes

As discussed above, on October 12, 2022 and October 21, 2022, we issued and sold $300 million and $19.5 million, respectively, in aggregate principal amount of the Notes in a private placement. The Notes were issued pursuant to an indenture, dated October 12, 2022, by and among us, the Subsidiary Guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee. The Notes will bear interest at a rate of 1.625% per year, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on May 1, 2023. The Notes will mature on November 1, 2027, unless earlier converted, redeemed or repurchased. The Notes were initially issued pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act.

We used approximately $29.7 million of the net proceeds from the Notes to pay for the cost of the Convertible Note Hedge Transactions, after such cost was partially offset by approximately $42.9 million of proceeds to us from the sale of Warrants in connection with the issuance of the Notes, all as described in Note 10, Long-Term Debt to our Consolidated Financial Statements. The Convertible Note Hedge Transactions and Warrants transactions are indexed to, and potentially settled in, our common stock and the net cost of $29.7 million has been recorded as a reduction to additional paid-in capital in the consolidated statement of shareholders’ equity. We used the remaining net proceeds to fund a portion of the consideration in the Sierra Wireless Acquisition and to pay related fees and expenses. For additional information on the Convertible Note Hedge Transactions and the Warrants, see Note 10, Long-Term Debt to our Consolidated Financial Statements.

Debt Commitment Letter

In connection with the Sierra Wireless Acquisition, we entered into the Commitment Letter with JPM pursuant to which JPM committed to provide (a) a backstop of certain amendments to our then-existing Credit Agreement and (b) the Bridge Commitment. During the third quarter of fiscal year 2023, the amendments and restatement of the Credit Agreement and the issuance of the Notes occurred to replace the backstop commitment and the Bridge Commitment, each of which has now terminated. For additional information on the Commitment Letter, see Note 10, Long-Term Debt, to our Consolidated Financial Statements.

Expected Uses of Liquidity

Capital Expenditures and Research and Development

We incur significant expenditures in order to fund the development, design and manufacture of new products. We intend to continue to focus on those areas that have shown potential for viable and profitable market opportunities, which may require additional investment in equipment and the hiring of additional design and application engineers aimed at developing new products. Certain of these expenditures, particularly the addition of design engineers, do not generate significant payback in the

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short-term. We plan to finance these expenditures with cash generated by our operations and our existing cash balances.

Purchases under our Stock Repurchase Program

We currently have in effect a stock repurchase program that was initially approved by our Board of Directors in March 2008. On March 11, 2021, our Board of Directors approved the expansion of the stock repurchase program by an additional $350.0 million. This program represents one of our principal efforts to return value to our stockholders. Under the program, we may repurchase our common stock at any time or from time to time, without prior notice, subject to market conditions and other considerations. Our repurchases may be made through Rule 10b5-1 and/or Rule 10b-18 or other trading plans, open market purchases, privately negotiated transactions, block purchases or other transactions. During fiscal years 2023 and 2022, we repurchased shares of common stock under this program for $50.0 million and $129.7 million, respectively. As of January 29, 2023, we had repurchased $589.0 million in shares of our common stock under the program since inception and the remaining authorization under the program was $209.4 million. We intend to fund repurchases under the program from cash on hand and borrowings on our Revolving Credit Facility. We have no obligation to repurchase any shares under the program and may suspend or discontinue it at any time.

Operating Leases

We have operating leases for real estate, vehicles, and office equipment with remaining lease terms of up to nine years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. Our operating lease liabilities totaled $32.7 million and $20.6 million as of January 29, 2023 and January 30, 2022, respectively.

Purchase Commitments

Capital purchase commitments and other open purchase commitments are for the purchase of plant, equipment, raw materials, supplies and services. They are not recorded liabilities in our Consolidated Balance Sheets as of January 29, 2023, as we have not yet received the related goods or taken title to the goods or received services. As of January 29, 2023, we had $12.0 million in open capital purchase commitments and $202.0 million in other open purchase commitments.

Compensation and Defined Benefit Plans

We maintain a deferred compensation plan for certain officers and key executives that allow participants to defer a portion of their compensation for future distribution at various times permitted by the plan. Our liability for deferred compensation under this plan was $42.3 million and $45.2 million as of January 29, 2023 and January 30, 2022, respectively, and is included in accrued liabilities and other long-term liabilities in the Consolidated Balance Sheets. The plan provides for a discretionary Company match up to a defined portion of the employee’s deferral, with any match subject to defined conditions.

We have purchased whole life insurance on the lives of certain of our current and former deferred compensation plan participants. This corporate-owned life insurance is held in a grantor trust and is intended to cover a majority of the costs of our deferred compensation plan. The cash surrender value of our corporate-owned life insurance was $33.7 million and $35.2 million as of January 29, 2023 and January 30, 2022, respectively, and is included in other assets in the Consolidated Balance Sheets. The decrease in the cash surrender value of the corporate-owned life insurance as of January 29, 2023 compared to January 30, 2022 was related to an overall decrease in market value, partially offset by $5.1 million of premiums paid in order to provide substantive coverage for our deferred compensation liability.

We maintain defined benefit pension plans for the employees of our Swiss subsidiaries and French subsidiary. Expected future payments under these plans totaled $27.0 million as of January 29, 2023.

The liability associated with vested, but unsettled restricted stock awards that are to be settled in cash totaled $6.1 million and $11.5 million as of January 29, 2023 and January 30, 2022, respectively, and was included in "Other long-term liabilities" in the Balance Sheets.

Working Capital

Working capital, defined as total current assets less total current liabilities, fluctuates depending on end-market demand and our effective management of certain items such as receivables, inventory and payables. In times of escalating demand, our working capital requirements may increase as we purchase additional manufacturing materials and increase production. In addition, our working capital may be affected by potential acquisitions and transactions involving our debt instruments. Although investments made to fund working capital will reduce our cash balances, these investments are necessary to support business and operating initiatives. Our working capital, excluding cash and cash equivalents, was $90.4 million and $94.3 million as of January 29, 2023 and January 30, 2022, respectively. Our working capital, including cash and cash equivalents and the current portion of long-term debt, was $325.9 million and $373.9 million as of January 29, 2023 and January 30, 2022, respectively.

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Cash Flows

One of our primary goals is to improve the cash flows from our existing business activities. Additionally, we will continue to seek to maintain or improve our existing business performance and deploy our accumulated cash balances in the most effective manner through alternatives such as capital expenditures, and potentially, acquisitions and other investments that support achievement of our business strategies. Acquisitions may be made for either cash or stock consideration, or a combination of both.

In summary, our cash flows for each period were as follows:

Operating Activities

Net cash provided by operating activities is driven by net income, adjusted for non-cash items and fluctuations in operating assets and liabilities.

Operating cash flows for fiscal year 2023 compared to fiscal year 2022 were unfavorably impacted by a $7.3 million debt commitment fee, a $67.6 million increase in SG&A expenses primarily due to share-based compensation acceleration expense and other transaction costs related to the Sierra Wireless Acquisition, as well as restructuring costs, and a $19.5 million increase in product development and engineering expenses primarily due to share-based compensation acceleration expense and new product introduction expenses and fluctuations in the timing of development activities, and favorably impacted by a 2.1% increase in net sales and by a $22.8 million incremental decrease in inventory spend.

Investing Activities

Net cash used in investing activities is primarily attributable to acquisitions, net of any cash received, capital expenditures, purchases of investments and premiums paid for corporate-owned life insurance, net of proceeds from sales of property, plant and equipment and proceeds from sales of investments.

On January 12, 2023, we acquired all of the outstanding equity interests of Sierra Wireless for total purchase consideration, net of cash acquired of $1.2 billion. We funded the cash consideration with a combination of cash on hand and $895.0 million of capital from term loans as described in Note 10, Long-Term Debt, to our Consolidated Financial Statements.

During fiscal year 2023, we received $26.2 million of proceeds from the divestiture of the Disposal Group, net of cash disposed. For additional information on the divestiture, see Note 3, Acquisition and Divestiture, to our Consolidated Financial Statements.

Capital expenditures were $28.3 million and $26.2 million in fiscal years 2023 and 2022, respectively, as we made significant investments to update and expand our production capabilities.

In fiscal years 2023 and 2022 we paid $6.7 million and $8.2 million, respectively, for strategic investments, including investments in companies that are enabling the LoRa and LoRaWAN®-based ecosystem.

In fiscal year 2023, we received $5.1 million of proceeds from corporate-owned life insurance death benefits, which included a $2.5 million gain. All $5.1 million of the proceeds were re-invested into our corporate-owned life insurance policy in order to provide substantive coverage for our deferred compensation liability. In fiscal year 2022, we paid $6.0 million for premiums on corporate-owned life insurance in order to provide substantive coverage for our deferred compensation liability.

Financing Activities

Net cash provided by financing activities is primarily attributable to proceeds from the Term Loan Facility, the Revolving Credit Facility, the Notes, the sale of the Warrants and stock option exercises, offset by the purchase of the Convertible Note Hedge Transactions, repurchases of outstanding common stock, payments on the Revolving Credit Facility, deferred financing costs and payments related to employee share-based compensation payroll taxes.

In fiscal year 2023, we paid $21.8 million in deferred financing costs related to the Revolving Credit Facility, the Term Loan Facility and the Notes, as discussed above.

In fiscal year 2023, we paid $14.2 million for employee share-based compensation payroll taxes and received $0.6 million in proceeds from the exercise of stock options, compared to payments of $19.4 million for employee share-based compensation payroll taxes and proceeds of $5.3 million from the exercise of stock options in fiscal year 2022. We do not directly control the

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timing of the exercise of stock options. Such exercises are independent decisions made by grantees and are influenced most directly by the stock price and the expiration dates of stock option awards. Such proceeds are difficult to forecast, resulting from several factors which are outside our control. We believe that such proceeds will remain a nominal source of cash in the future.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with GAAP. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities. Accordingly, actual results could differ materially from our estimates. We consider an accounting policy to be a "critical accounting policy and estimate" if: (1) we must make assumptions that were uncertain when the judgment was made, and (2) changes in the estimate assumptions or selection of a different estimate methodology could have a significant impact on our financial position and the results that we report in our consolidated financial statements. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made. We believe the following represent our most significant accounting estimates:

•Inventories - We value our inventory at the lower of cost or net realizable value, which requires us to make estimates regarding potential obsolescence or lack of marketability. We reduce the basis of our inventory due to changes in demand or change in product life cycles. The estimation of customer demand requires management to evaluate and make assumptions of the impact of changes in demand or changes in product life cycles on current sales levels. Our write-down to net realizable value at the end of fiscal year 2023 and 2022 represented 25.8% and 27.5% of gross inventory, respectively. Based on fiscal year 2023 ending inventory, an increase in the write-down by one percent of gross inventory would decrease net inventory and increase cost of goods sold by $2.8 million.

•Revenue recognition - Net sales reflect the transaction prices for contracts, which include units shipped at selling prices reduced by variable consideration. Determination of variable consideration requires judgment by us and includes expected sales returns and other price adjustments. Variable consideration is estimated using the expected value method considering all reasonably available information, including our historical experience and our current expectations, and is reflected in the transaction price when sales are recorded. In fiscal year 2023, net sales were reduced by $24.2 million in estimated variable consideration, or 3.1% of gross revenue. In fiscal year 2022, net sales were reduced by $21.0 million in estimated variable consideration, or 2.8% of gross revenue. If variable consideration were estimated to be one percent higher, fiscal year 2023 revenue would have decreased by $7.8 million.

•Income taxes - The identification and measurement of deferred tax assets and liabilities and the provisional estimates associated with applicable tax laws require a high degree of judgment and interpretation of tax laws in the U.S. and several other foreign jurisdictions. We use judgment in estimating whether or not our deferred tax assets will ultimately be realized, expected outcomes of audits and likelihood of our tax positions being sustained, forecasted earnings and available tax planning strategies.

•Business Combinations and Goodwill - The Sierra Wireless Acquisition was accounted for under the acquisition method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. In determining the fair value of the acquired assets and liabilities, we determined this in consultation with third-party valuation advisors. Acquired intangible assets with finite lives are amortized over their estimated useful lives. Adjustments to fair value assessments are recorded to goodwill over the purchase price allocation period. The determination of the estimated fair value of our acquired intangible assets requires significant judgements and estimates and is most sensitive to future revenue forecasts.

Goodwill and acquired intangible assets with indefinite lives are not amortized. We review goodwill and acquired indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We also perform an annual impairment test in the fourth quarter of each year. We test goodwill and acquired indefinite-lived intangible assets for impairment between annual tests if events occur or circumstances change that would more likely than not reduce our enterprise fair value below its book value. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in an entity’s market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors.

We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment. For selected reporting units where we use the qualitative approach, we perform a qualitative evaluation of events and circumstances impacting the reporting unit to determine the likelihood of goodwill impairment. Based on that qualitative evaluation, if we determine it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary. Otherwise we perform a quantitative impairment test. We perform a quantitative test for each reporting unit at least once every three years.

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For goodwill impairment testing using the quantitative approach, we estimate the fair value of the selected reporting units primarily through the use of a discounted cash flow model based on our best estimate of amounts and timing of future revenues and cash flows and our most recent business and strategic plans, and compare the estimated fair value to the carrying value of the reporting unit, including goodwill. The discounted cash flow model requires judgmental assumptions about projected revenue growth, future operating margins, discount rates and terminal values over a multi-year period. In addition, we also determine the fair value using the public company guideline method. There are inherent uncertainties related to these assumptions and management’s judgment in applying them to the analysis of goodwill impairment. While we believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting units, it is possible a material change could occur. If actual results are not consistent with management’s estimates and assumptions, goodwill may be overstated and a charge would need to be taken against net earnings.

When using a quantitative approach, changes in our projections used in the discounted cash flow model could affect the estimated fair value of certain of our reporting units and could result in a goodwill impairment charge in a future period. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of our recorded goodwill, differences in assumptions may have a material effect on the results of our impairment analysis.

During the fourth quarter of fiscal 2023, we had 3 reporting units for goodwill impairment testing. A qualitative test was performed for one reporting unit and a quantitative test was performed for the remaining two reporting units. Our analysis for fiscal 2023 indicated that in all instances, the fair value of our reporting units exceeded their carrying values and consequently did not result in an impairment charge.

New Accounting Standards

New accounting standards are discussed in Note 2, Significant Accounting Policies, to our Consolidated Financial Statements.