# ANALOG DEVICES INC (ADI) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ANALOG DEVICES INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/6281/000000628124000204/adi-20241102.htm
Accession: 0000006281-24-000204
Filing date: 2024-11-26
Report date: 2024-11-02
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ADI/
All MD&A years: /company/ADI/mda/
Previous year: /company/ADI/mda/fy2023/ (FY 2023)
Next year: /company/ADI/mda/fy2025/ (FY 2025)

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (all tabular amounts in thousands except per share amounts)

The following discussion includes results of operations and financial condition for the fiscal year ended November 2, 2024 (fiscal 2024) and the fiscal year ended October 28, 2023 (fiscal 2023) and year-over-year comparisons between fiscal 2024 and fiscal 2023. For discussion on results of operations and financial condition for fiscal 2023 and the fiscal year ended October 29, 2022 (fiscal 2022) and year-over-year comparisons between fiscal 2023 and fiscal 2022, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for fiscal 2023 filed with the Securities and Exchange Commission on November 21, 2023. Our fiscal year is the 52-week or 53-week period ending on the Saturday closest to the last day in October. Fiscal 2024 was a 53-week fiscal period, while fiscal 2023 was a 52-week fiscal period. The additional week in fiscal 2024 is included in the first quarter ended February 3, 2024. Therefore, fiscal 2024 includes an additional week of operations as compared to fiscal 2023.

Results of Operations

Overview

[[GREPCENT_TABLE]]
[["","Fiscal Year","","2024 over 2023"],["","2024","","2023","","","","$ Change","","% Change"],["Revenue","$","9,427,157","","","$","12,305,539","","","","","$","(2,878,382)","","","(23)","%"],["Gross margin %","57.1","%","","64.0","%"],["Net income","$","1,635,273","","","$","3,314,579","","","","","$","(1,679,306)","","","(51)","%"],["Net income as a % of revenue","17.3","%","","26.9","%"],["Diluted EPS","$","3.28","","","$","6.55","","","","","$","(3.27)","","","(50)","%"]]
[[/GREPCENT_TABLE]]

Revenue Trends by End Market

The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which our product will be incorporated. As data systems for capturing and tracking this data and our methodology evolves and improves, the categorization of products by end market can vary over time. When this occurs, we reclassify revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market.

[[GREPCENT_TABLE]]
[["","Fiscal 2024","","Fiscal 2023"],["","Revenue","","% of Total Revenue (1)","","Y/Y%","","Revenue","","% of Total Revenue (1)"],["Industrial","$","4,314,280","","","46","%","","(35)","%","","$","6,611,794","","","54","%"],["Automotive","2,827,439","","","30","%","","(2)","%","","2,876,140","","","23","%"],["Communications","1,080,496","","","11","%","","(33)","%","","1,606,426","","","13","%"],["Consumer","1,204,942","","","13","%","","(1)","%","","1,211,179","","","10","%"],["Total Revenue","$","9,427,157","","","100","%","","(23)","%","","$","12,305,539","","","100","%"]]
[[/GREPCENT_TABLE]]

_______________________________________

(1)The sum of the individual percentages may not equal the total due to rounding.

Revenue decreased 23% in fiscal 2024 as compared to fiscal 2023 primarily as a result of weaker macroeconomic trends. This was pronounced in our Industrial end market as customers decreased their inventory balances and in the Communications end market primarily due to the timing of infrastructure deployment cycles. The Automotive and Consumer end markets declined to a lesser extent as demand weakened driven by reduced consumer spending.

Revenue by Sales Channel

The following table summarizes revenue by sales channel. We sell our products globally through a direct sales force, third-party distributors, independent sales representatives and via our website. Distributors are customers that buy products with the intention of reselling them. Direct customers are non-distributor customers and consist primarily of original equipment manufacturers (OEMs). Other customers include the U.S. government, government prime contractors and certain commercial customers for which revenue is recorded over time.

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[[GREPCENT_TABLE]]
[["","Fiscal 2024","","Fiscal 2023"],["","Revenue","","% of Total Revenue (1)","","Revenue","","% of Total Revenue (1)"],["Distributors","$","5,505,779","","","58","%","","$","7,534,894","","","61","%"],["Direct customers","3,772,945","","","40","%","","4,603,166","","","37","%"],["Other","148,433","","","2","%","","167,479","","","1","%"],["Total Revenue","$","9,427,157","","","100","%","","$","12,305,539","","","100","%"]]
[[/GREPCENT_TABLE]]

_______________________________________

(1)The sum of the individual percentages may not equal the total due to rounding.

As indicated in the table above, the percentage of total revenue sold via each channel has remained relatively consistent in the periods presented, but can fluctuate from time to time based on end market revenue trends. As a percentage of total revenue, the decrease in the distributor channel is primarily due to the decrease in revenue in our Industrial end market.

Revenue Trends by Geographic Region

Geographic revenue information for fiscal 2024 and fiscal 2023 reflects the geographic location of the distributors or OEMs who purchased the Company’s products. This may differ from the geographic location of the end customers particularly in cases where a third-party contract manufacturer purchases the Company’s products through distributors.

[[GREPCENT_TABLE]]
[["","Fiscal Year","","2024 over 2023"],["","2024","","2023","","","","$ Change","","% Change (1)"],["United States","$","2,840,426","","","$","4,165,296","","","","","$","(1,324,870)","","","(32)","%"],["Rest of North and South America","62,318","","","88,579","","","","","(26,261)","","","(30)","%"],["Europe","2,109,529","","","3,001,871","","","","","(892,342)","","","(30)","%"],["Japan","1,085,631","","","1,397,119","","","","","(311,488)","","","(22)","%"],["China","2,128,840","","","2,229,631","","","","","(100,791)","","","(5)","%"],["Rest of Asia","1,200,413","","","1,423,043","","","","","(222,630)","","","(16)","%"],["Total Revenue","$","9,427,157","","","$","12,305,539","","","","","$","(2,878,382)","","","(23)","%"]]
[[/GREPCENT_TABLE]]

_______________________________________

(1)The sum of the individual percentages may not equal the total due to rounding.

In all periods presented, the predominant regions comprising “Rest of North and South America” are Canada and Mexico; the predominant regions comprising “Europe” are Germany, Sweden, Israel and the Netherlands; and the predominant regions comprising “Rest of Asia” are Taiwan, Malaysia, South Korea and Singapore.

Total revenue decreased in fiscal 2024 as compared to fiscal 2023 in all regions due to weaker macroeconomic conditions as discussed above under the heading Revenue Trends by End Market.

Gross Margin

[[GREPCENT_TABLE]]
[["","Fiscal Year","","","","2024 over 2023"],["","2024","","2023","","","","$ Change","","% Change"],["Gross margin","$","5,381,343","","","$","7,877,218","","","","","$","(2,495,875)","","","(32)","%"],["Gross margin %","57.1","%","","64.0","%"]]
[[/GREPCENT_TABLE]]

Gross margin percentage in fiscal 2024 decreased by 690 basis points compared to fiscal 2023, primarily due to lower utilization of our factories due to decreased customer demand and unfavorable product mix.

Research and Development (R&D)

[[GREPCENT_TABLE]]
[["","Fiscal Year","","2024 over 2023"],["","2024","","2023","","","","$ Change","","% Change"],["R&D expenses","$","1,487,863","","","$","1,660,194","","","","","$","(172,331)","","","(10)","%"],["R&D expenses as a % of revenue","16","%","","13","%"]]
[[/GREPCENT_TABLE]]

R&D expenses decreased in fiscal 2024 as compared to fiscal 2023 primarily as a result of lower R&D employee related variable compensation expenses, partially offset by the impact of an additional week of operations in fiscal 2024 as compared to fiscal 2023.

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R&D expenses as a percentage of revenue will fluctuate from year-to-year depending on the amount of revenue and the success of new product development efforts, which we view as critical to our future growth. We expect to continue the development of innovative technologies and processes for new products. We believe that a continued commitment to R&D is essential to maintain product leadership with our existing products as well as to provide innovative new product offerings.

Selling, Marketing, General and Administrative (SMG&A)

[[GREPCENT_TABLE]]
[["","Fiscal Year","","2024 over 2023"],["","2024","","2023","","","","$ Change","","% Change"],["SMG&A expenses","$","1,068,640","","","$","1,273,584","","","","","$","(204,944)","","","(16)","%"],["SMG&A expenses as a % of revenue","11","%","","10","%"]]
[[/GREPCENT_TABLE]]

SMG&A expenses decreased in fiscal 2024 as compared to fiscal 2023, primarily as a result of lower variable compensation expenses, SMG&A employee related salary and benefit expenses and discretionary spending. The decrease was partially offset by an additional week of operations in fiscal 2024 as compared to fiscal 2023.

Amortization of Intangibles

[[GREPCENT_TABLE]]
[["","Fiscal Year","","2024 over 2023"],["","2024","","2023","","","","$ Change","","% Change"],["Amortization expenses","$","754,784","","","$","959,618","","","","","$","(204,834)","","","(21)","%"],["Amortization expenses as a % of revenue","8","%","","8","%"]]
[[/GREPCENT_TABLE]]

Amortization expenses decreased in fiscal 2024 as compared to fiscal 2023, primarily as a result of a portion of our acquired intangible assets becoming fully amortized during fiscal 2023.

Special Charges, Net

[[GREPCENT_TABLE]]
[["","Fiscal Year","","2024 over 2023"],["","2024","","2023","","","","$ Change","","% Change"],["Special charges, net","$","37,258","","","$","160,710","","","","","$","(123,452)","","","(77)","%"],["Special charges, net as a % of revenue","\u2014","%","","1","%"]]
[[/GREPCENT_TABLE]]

Special charges, net decreased in fiscal 2024 as compared to fiscal 2023, primarily due to decreased charges related to our Q4 2023 Plan. See Note 5, Special Charges, Net, of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for more information.

Operating Income

[[GREPCENT_TABLE]]
[["","Fiscal Year","","","","2024 over 2023"],["","2024","","2023","","","","$ Change","","% Change"],["Operating income","$","2,032,798","","","$","3,823,112","","","","","$","(1,790,314)","","","(47)","%"],["Operating income as a % of revenue","21.6","%","","31.1","%"]]
[[/GREPCENT_TABLE]]

The decrease in operating income in fiscal 2024 as compared to fiscal 2023 was primarily the result of a decrease in revenue which contributed to a decrease in gross margin of $2,495.9 million, partially offset by a $204.9 million decrease in SMG&A expenses, a $204.8 million decrease in amortization expenses, a $172.3 million decrease in R&D expenses and a $123.5 million decrease in special charges, net, as more fully described above.

Nonoperating Expense (Income)

[[GREPCENT_TABLE]]
[["","Fiscal Year","","2024 over 2023"],["","2024","","2023","","","","$ Change","","% Change"],["Nonoperating expense (income)","$","255,458","","","$","215,109","","","","","$","40,349","","","19","%"]]
[[/GREPCENT_TABLE]]

The year-over-year increase in nonoperating expense in fiscal 2024 as compared to fiscal 2023 was primarily the result of higher interest expense related to our debt obligations and lower net gains from other investments, partially offset by higher interest income.

31

Provision for Income Taxes

[[GREPCENT_TABLE]]
[["","Fiscal Year","","2024 over 2023"],["","2024","","2023","","","","$ Change","","% Change"],["Provision for income taxes","$","142,067","","","$","293,424","","","","","$","(151,357)","","","(52)","%"],["Effective income tax rate","8.0","%","","8.1","%"]]
[[/GREPCENT_TABLE]]

Our effective tax rates for fiscal 2024 and fiscal 2023 were below the U.S. statutory rate of 21% due to lower statutory tax rates applicable to our operations in the foreign jurisdictions in which we earn income. For fiscal 2024 and fiscal 2023 our pretax income was primarily generated in Ireland at a tax rate of 12.5%. Our effective tax rate for fiscal 2023 was also impacted by a discrete income tax benefit recorded of $81.7 million resulting from the approval granted by the Joint Committee on Taxation of our federal corporate income tax relief claim which reduced the amount of transition tax owed under the Tax Cuts and Jobs Act of 2017.

See Note 12, Income Taxes, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further discussion.

Net Income

[[GREPCENT_TABLE]]
[["","Fiscal Year","","2024 over 2023"],["","2024","","2023","","","","$ Change","","% Change"],["Net income","$","1,635,273","","","$","3,314,579","","","","","$","(1,679,306)","","","(51)","%"],["Net income, as a % of revenue","17.3","%","","26.9","%"],["Diluted EPS","$","3.28","","","$","6.55","","","","","$","(3.27)","","","(50)","%"]]
[[/GREPCENT_TABLE]]

The decrease in net income in fiscal 2024 as compared to fiscal 2023 was a result of a $1,790.3 million decrease in operating income and a $40.3 million increase in nonoperating expense, partially offset by a $151.4 million decrease in provision for income taxes.

Liquidity and Capital Resources

At November 2, 2024, our principal source of liquidity was $2.4 billion of cash, cash equivalents and short-term investments, of which approximately $1.3 billion was held in the United States, with the balance held outside the United States in various foreign subsidiaries. We manage our worldwide cash requirements by, among other things, reviewing available funds held by our foreign subsidiaries and the cost effectiveness by which those funds can be accessed in the United States. We do not expect current regulatory restrictions or taxes on repatriation to have a material adverse effect on our overall liquidity, financial condition or results of operations. Our cash, cash equivalents and short-term investments consist of highly liquid investments, including money market funds and corporate and bank obligations. We maintain these balances with counterparties with high credit ratings, and continually monitor the amount of credit exposure to any one issuer and diversify our investments in order to minimize our credit risk.

We believe that our existing sources of liquidity and cash expected to be generated from future operations, together with existing and anticipated available short- and long-term financing, will be sufficient to fund operations, capital expenditures, research and development efforts and dividend payments (if any) in the immediate future and for at least the next twelve months.

[[GREPCENT_TABLE]]
[["","Fiscal Year"],["","2024","","2023"],["Net cash provided by operating activities","$","3,852,529","","","$","4,817,634"],["Net cash provided by operating activities as a % of revenue","41","%","","39","%"],["Net cash used for investing activities","$","(1,104,858)","","","$","(1,266,385)"],["Net cash used for financing activities","$","(1,714,390)","","","$","(4,063,760)"]]
[[/GREPCENT_TABLE]]

The following changes contributed to the net change in cash and cash equivalents from fiscal 2023 to fiscal 2024.

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Operating Activities

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. The decrease in cash provided by operating activities during fiscal 2024 as compared to fiscal 2023 was primarily a result of lower net income adjusted for noncash items partially offset by changes in working capital.

Investing Activities

Investing cash flows generally consist of capital expenditures and cash used for acquisitions. The decrease in cash used for investing activities during fiscal 2024 as compared to fiscal 2023 was primarily the result of a decrease in cash used for capital expenditures, partially offset by the net impact of purchases and maturities of short-term investments during fiscal 2024.

Financing Activities

Financing cash flows generally consist of payments of dividends to shareholders, repurchases of common stock, issuance and repayment of debt and proceeds from the sale of shares of common stock pursuant to employee equity incentive plans. The decrease in cash used for financing activities during fiscal 2024 as compared to fiscal 2023 was primarily the result of lower common stock repurchases.

Working Capital

[[GREPCENT_TABLE]]
[["","Fiscal Year"],["","2024","","2023","","$ Change","% Change"],["Accounts receivable, net","$","1,336,331","","","$","1,469,734","","","$","(133,403)","","(9)","%"],["Days sales outstanding (1)","54","","","48"],["Inventory","$","1,447,687","","","$","1,642,214","","","$","(194,527)","","(12)","%"],["Days cost of sales in inventory (1)","139","","","125"]]
[[/GREPCENT_TABLE]]

_______________________________________

(1)We use the average of the current year and prior year ending net accounts receivable and ending inventory balance in our calculation of days sales outstanding and days cost of sales in inventory, respectively. Cost of sales amounts used in the calculation of days cost of sales in inventory include accounting adjustments related to amortization of developed technology intangible assets acquired and depreciation related to the write-up of fixed assets to fair value as a result of the acquisition of Maxim.

The decrease in accounts receivable for fiscal 2024 compared to fiscal 2023 was primarily the result of variations in the timing of collections and billings and decreased revenue levels in the fourth quarter of fiscal 2024 as compared to the fourth quarter of fiscal 2023.

Inventory decreased in fiscal 2024 as compared to fiscal 2023, primarily as a result of our efforts to balance manufacturing production, demand and inventory levels. Our inventory levels are impacted by our need to support forecasted sales demand and variations between those forecasts and actual demand.

Current liabilities decreased to $3.0 billion at November 2, 2024 from $3.2 billion recorded at the end of fiscal 2023, primarily due to decreases in accrued liabilities and current debt, partially offset by increases in income taxes payable.

Revolving Credit Facility

Our Third Amended and Restated Revolving Credit Agreement, dated as of June 23, 2021, with Bank of America N.A. as administrative agent and the other banks identified therein as lenders, which was subsequently amended on December 20, 2022 and July 24, 2023 (as amended, the Revolving Credit Agreement) provides for a five year unsecured revolving credit facility in an aggregate principal amount not to exceed $2.5 billion (subject to certain terms and conditions).

We may borrow under this revolving credit facility in the future and use the proceeds for repayment of existing indebtedness, stock repurchases, acquisitions, capital expenditures, working capital and other lawful corporate purposes. The terms of the Revolving Credit Agreement impose restrictions on our ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. In addition, the Revolving Credit Agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) of not greater than 3.5 to 1.0. As of November 2, 2024, we were in compliance with these covenants. See Note 13, Revolving Credit Facility, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information on our revolving credit facility.

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Debt

As of November 2, 2024, we had approximately $7.0 billion of carrying value outstanding on our senior notes. The difference in the carrying value of the debt and the principal is due to the unamortized discount and issuance fees and other adjustments on these instruments. The indentures governing certain of our debt instruments contain covenants that may limit our ability to: incur, create, assume or guarantee any debt or borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of our assets to, any other party. As of November 2, 2024, we were compliant with these covenants. See Note 14, Debt of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information on our outstanding debt.

Commercial Paper Program

Under our commercial paper program, we may issue short-term, unsecured commercial paper notes in amounts up to a maximum aggregate face amount of $2.5 billion outstanding at any time, with maturities of up to 397 days from the date of issuance. As of November 2, 2024, we had $547.7 million of outstanding borrowings under the commercial paper program recorded in the Consolidated Balance Sheet. We intend to use the net proceeds of the commercial paper program for general corporate purposes, including without limitation, repayment of indebtedness, stock repurchases, acquisitions, capital expenditures and working capital.

Stock Repurchase Program

Our common stock repurchase program has been in place since August 2004. Since inception, our Board of Directors has authorized us to repurchase $16.7 billion of our common stock under the program, which includes the $8.5 billion authorization approved by the Board of Directors on August 25, 2021. Under the program, we may repurchase outstanding shares of our common stock from time to time in the open market and through privately negotiated transactions. Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire when the full dollar amount of the authorization has been used to repurchase shares under the program.

As of November 2, 2024, $1.7 billion remained available for repurchase under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. Future repurchases of common stock will be dependent upon our financial position, results of operations, outlook, liquidity and other factors we deem relevant.

Capital Expenditures

Net additions to property, plant and equipment were $730.5 million in fiscal 2024 as we invested to enhance our global resiliency and continue to diversify our global manufacturing footprint. We expect capital expenditures for fiscal 2025 to be between approximately 4% and 6% of fiscal 2025 revenue. These capital expenditures will be funded with a combination of cash on hand and cash expected to be generated from future operations, together with existing and anticipated available short- and long-term financing.

Dividends

On November 25, 2024, our Board of Directors declared a cash dividend of $0.92 per outstanding share of common stock. The dividend will be paid on December 20, 2024 to all shareholders of record at the close of business on December 9, 2024 and is expected to total approximately $456.6 million. We currently expect quarterly dividends to continue in future periods, although they remain subject to determination and declaration by our Board of Directors. The payment of future dividends, if any, will be based on several factors, including our financial performance, outlook and liquidity.

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Contractual Obligations

The table below summarizes our material contractual obligations in specified periods as of November 2, 2024:

[[GREPCENT_TABLE]]
[["","","","","Payment due by period"],["","","","","Less than","","","","","","More than"],["(thousands)","","Total","","1 Year","","1-3 Years","","3-5 Years","","5 Years"],["Debt obligations (1)","","$","7,664,815","","","$","947,738","","","$","1,340,212","","","$","750,000","","","$","4,626,865"],["Interest payments associated with debt obligations","","3,169,308","","","232,301","","","433,714","","","343,339","","","2,159,954"],["Investment-related commitments (2)","","198,000","","","33,000","","","66,000","","","66,000","","","33,000"],["Transition tax (3)","","302,141","","","149,224","","","152,917","","","\u2014","","","\u2014"],["Operating leases (4)","","434,856","","","83,059","","","146,604","","","106,743","","","98,450"],["Inventory-related purchase commitments (5)","","485,355","","","153,434","","","259,236","","","49,352","","","23,333"],["Total","","$","12,254,475","","","$","1,598,756","","","$","2,398,683","","","$","1,315,434","","","$","6,941,602"]]
[[/GREPCENT_TABLE]]

_______________________________________

(1)Debt obligations are assumed to be held to maturity.

(2)Commitments related to certain investments in venture funds directed to our strategic areas of targeted growth in digital biology, life sciences and sustainability, among others.

(3)Tax obligation relates to the one-time tax on deemed repatriated earnings under the Tax Cuts and Jobs Act.

(4)Certain of our operating lease obligations include escalation clauses. These escalating payment requirements are reflected in the table.

(5)We have supplier commitments for the purchase of materials and supplies in advance or with minimum purchase quantities.

As of November 2, 2024, our total liabilities associated with uncertain tax positions was $185.8 million, which are included in non-current income taxes payable in our Consolidated Balance Sheets contained in Item 8 of this Annual Report on Form 10-K. Due to the complexity associated with our tax uncertainties, we cannot make a reasonably reliable estimate of the period in which we expect to settle the non-current liabilities associated with these uncertain tax positions. Therefore, we have not included these uncertain tax positions in the above contractual obligations table.

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) and are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards will not have a material impact on our future financial condition and results of operations. See Note 2s, New Accounting Pronouncements, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for a description of recently issued and adopted accounting pronouncements, including the dates of adoption and impact on our financial condition and results of operations.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of the financial condition and results of operations is based upon the Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future based on available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements. We also have other policies that we consider key accounting policies; however, the application of these policies does not require us to make significant estimates or judgments that are difficult or subjective.

Revenue Recognition

Recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration that we expect to receive in exchange for those products or services. We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied. The majority of our shipping terms permit us to recognize revenue at point of shipment or delivery. Certain shipping terms require the goods to be through customs or be received by the customer before title passes. In those instances, we defer the revenue recognized until title and control of the promised goods

35

have passed to the customer. Shipping costs are charged to selling, marketing, general and administrative expense as incurred. Sales taxes are excluded from revenue.

Revenue from contracts with the United States government, government prime contractors and certain commercial customers is recorded over time using either units delivered or costs incurred as the measurement basis for progress toward completion. These measures are used to measure results directly and is generally the best measure of progress toward completion in circumstances in which a reliable measure of output can be established. Estimated revenue in excess of amounts billed is reported as unbilled receivables. Contract accounting requires judgment in estimating costs and assumptions related to technical issues and delivery schedule. Contract costs include material, subcontract costs, labor and an allocation of indirect costs. The estimation of costs at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Changes in contract performance, estimated gross margin, including the impact of final contract settlements, and estimated losses are recognized in the period in which the changes or losses are determined.

Performance Obligations: Substantially all of our contracts with customers contain a single performance obligation, the sale of mixed-signal integrated circuit (IC) products. Such sales represent a single performance obligation because the sale is one type of good or includes multiple goods that are neither capable of being distinct nor separable from the other promises in the contract. This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery. Unsatisfied performance obligations primarily represent contracts for products with future delivery dates and with an original expected duration of one year or less. We generally warrant that our products will meet their published specifications, and that we will repair or replace defective products, for one year from the date title passes from us to the customer. Specific accruals are recorded for known product warranty issues.

Transaction Price: The transaction price reflects our expectations about the consideration we will be entitled to receive from the customer and may include fixed or variable amounts. Fixed consideration primarily includes sales to direct customers and sales to distributors in which both the sale to the distributor and the sale to the end customer occur within the same reporting period. Variable consideration includes sales in which the amount of consideration that we will receive is unknown as of the end of a reporting period. The vast majority of such consideration are credits issued to the distributor due to price protection, but also include sales made to distributors under agreements that allow certain rights of return, referred to as stock rotation. Price protection represents price discounts granted to certain distributors to allow the distributor to earn an appropriate margin on sales negotiated with certain customers and in the event of a price decrease subsequent to the date the product was shipped and billed to the distributor. Stock rotation allows distributors limited levels of returns in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. A liability for distributor credits covering variable consideration is made based on management’s estimate of historical experience rates as well as considering economic conditions and contractual terms. To date, actual distributor claims activity has been materially consistent with the provisions we have made based on our historical estimates.

Contract Balances: Accounts receivable represents our unconditional right to receive consideration from our customers. Payments are typically due within 30 to 45 days of invoicing and do not include a significant financing component. To date, there have been no material impairment losses on accounts receivable. There were no material contract assets or contract liabilities recorded on the Consolidated Balance Sheets in any of the periods presented.

Inventory Valuation

We value inventories at the lower of cost (first-in, first-out method) or net realizable value. Because of the cyclical nature of the semiconductor industry, changes in inventory levels, obsolescence of technology, and product life cycles, we write down inventories to net realizable value. We employ a variety of methodologies to determine the net realizable value of inventory. While a portion of the calculation is determined via reference to the age of inventory and lower of cost or net realizable value calculations, an element of the calculation is subject to significant judgments made by us about future demand for our inventory. If actual demand for our products is less than our estimates, additional adjustments to existing inventories may need to be recorded in future periods. To date, our actual results have not been materially different than our estimates.

Goodwill

Goodwill is subject to impairment tests annually or more frequently if events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable, utilizing either the qualitative or quantitative method. We test goodwill for impairment at the reporting unit level, which we determined is consistent with our identified operating segments, on an annual basis on the first day of the fourth quarter (on or about August 4th) or more frequently if we believe indicators of impairment exist or we reorganize our operating segments or reporting units.

We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value. When using the qualitative method, we consider several factors, including the following:

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–the amount by which the fair values of each reporting unit exceeded their carrying values as of the date of the most recent quantitative impairment analysis, which indicated there would need to be substantial negative developments in the markets in which these reporting units operate in order for there to be potential impairment;

–the carrying values of these reporting units as of the assessment date compared to their previously calculated fair values as of the date of the most recent quantitative impairment analysis;

–the current forecasts as compared to the forecasts included in the most recent quantitative impairment analysis;

–public information from competitors and other industry information to determine if there were any significant adverse trends in our competitors’ businesses;

–changes in the value of major U.S. stock indices that could suggest declines in overall market stability that could impact the valuation of our reporting units;

–changes in our market capitalization and overall enterprise valuation to determine if there were any significant decreases that could be an indication that the valuation of our reporting units had significantly decreased; and

–whether there had been any significant increases to the weighted-average cost of capital rates for each reporting unit, which could materially lower our prior valuation conclusions under a discounted cash flow approach.

If we elect not to use this option, or we determine that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we perform the quantitative goodwill impairment test. The quantitative goodwill impairment test requires an entity to compare the fair value of a reporting unit with its carrying amount. If fair value is determined to be less than carrying value, an impairment loss is recognized for the amount of the carrying value that exceeds the amount of the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Additionally, we consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. We determine the fair value of our reporting units using a weighting of the income and market approaches. Under the income approach, we use a discounted cash flow methodology which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, we use the guideline public company method. Under this method we utilize information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, to create valuation multiples that are applied to the operating performance of the reporting unit being tested, in order to obtain their respective fair values. In order to assess the reasonableness of the calculated reporting unit fair values, we reconcile the aggregate fair values of our reporting units determined, as described above, to our total company market capitalization, allowing for a reasonable control premium.

During fiscal 2024 and fiscal 2023, we elected to use the qualitative method of assessing goodwill for all of our reporting units. In all periods presented, we concluded the reporting units’ fair values exceeded their carrying amounts as of the assessment dates and no risk of impairment existed.

Accounting for Income Taxes

We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of income tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of the recognition of certain expenses for tax and financial statement purposes. We assess the likelihood of the realization of deferred tax assets and record a corresponding valuation allowance as necessary if we determine those deferred tax assets may not be realized due to the uncertainty of the timing and amount to be realized of certain state and international tax credit carryovers. In reaching our conclusion, we evaluate certain relevant criteria including the existence of deferred tax liabilities that can be used to realize deferred tax assets, the taxable income in prior carryback years in the impacted state and international jurisdictions that can be used to absorb net operating losses and taxable income in future years. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets, which may result in an increase or decrease to our income tax provision in future periods.

We account for uncertain tax positions by first determining if it is “more likely than not” that a tax position will be sustained by the appropriate taxing authorities prior to recording any benefit in the financial statements. An uncertain income tax position is not recognized if it has less than a 50% likelihood of being sustained. For those tax positions where it is more likely than not that a tax position will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. We classify interest and penalties related to uncertain tax positions within the provision for income taxes line of the Consolidated Statements of Income. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in known facts or circumstances, changes in tax law, effectively settled issues under audit, and new guidance on legislative interpretations. A change in these factors could

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result in the recognition of an increase or decrease to our income tax provision, which could materially impact our consolidated financial position and results of operations.

In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement and royalty arrangements among related entities. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and income tax liabilities. In the event our assumptions are incorrect, the differences could have a material impact on our income tax provision and operating results in the period in which such determination is made. In addition to the factors described above, our current and expected effective tax rate is based on then-current tax law. Significant changes during the year in enacted tax law could affect these estimates.

See Note 12, Income Taxes, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further discussion.

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