What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-03 compared with 2020-01-29 · 92 added, 117 removed, 205 unchanged (50% of the section changed)

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Our fiscal year-end financial reporting periods are a 52- or 53-week fiscal year that ends on the Saturday closest to December 31.

Fiscal 2019, 2018 and 2017 were 52-week years and ended on December 28, 2019, December 29, 2018 and December 30, 2017, respectively.

Fiscal 2020 will have 53 weeks with the extra week occurring in the first quarter of the year.

Fiscal 2020 was a 53-week year with the extra week occurring in the first quarter of the year and ended on January 2, 2021.

Fiscal 2019 and 2018 were 52-week years and ended on December 28, 2019 and December 29, 2018, respectively.

Impact of COVID-19

A new strain of novel coronavirus which causes a severe respiratory disease (“COVID-19”) was identified in 2019, and subsequently declared a worldwide pandemic by the World Health Organization.

We implemented a response plan and continued operations while largely transitioning our global workforce to a remote work model.

The third parties that perform our semiconductor manufacturing, assembly, packaging and testing have generally remained operational.

The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration, severity and spread of the pandemic, related restrictions on travel and transportation and other actions that may be taken by governmental authorities, the impact to the business of our suppliers or customers, and other items identified under “Risk Factors” above, all of which are uncertain and cannot be predicted.

An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition.

We are a leading provider of silicon, software and solutions for a smarter, more connected world.

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We group our products into the following categories:

● Internet of Things products, which include wireless, microcontroller (MCU) and sensor products;

● Broadcast products, which include broadcast consumer and automotive products;

● Infrastructure products, which include timing products (clocks and oscillators), and isolation devices;

● Access products, which include Voice over IP (VoIP) products, embedded modems and Power over Ethernet (PoE) devices.

● Internet of Things products, which include wireless connectivity, microcontroller (MCU) and sensor products;

● Infrastructure and automotive products, which include timing products (clocks and oscillators);

power products (isolation and Power over Ethernet (PoE) devices);

broadcast products (consumer and automotive radio devices);

and access products (Voice over IP (VoIP) products and embedded modems).

We have combined our previous product groups, Infrastructure, Broadcast and Access, into the Infrastructure and automotive product group.

Prior periods were retrospectively adjusted.

The sales cycle for our ICs can be as long as 12 months or more.

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Current Period Highlights

Revenues decreased $30.7 million in fiscal 2019 compared to fiscal 2018, due to decreased revenues from our Infrastructure, Broadcast and Access products offset by increased revenues from our IoT products.

Gross profit decreased $11.1 million during the same period due primarily to decreased product sales.

Gross margin increased to 60.9% in fiscal 2019 compared to 60.1% in fiscal 2018 primarily due to the fair value write-up associated with acquired inventory in fiscal 2018, offset in part by a decrease resulting from variations in product mix.

Operating expenses increased $17.4 million in fiscal 2019 compared to fiscal 2018 due primarily to increased personnel-related expenses, occupancy costs and amortization of intangible assets, offset in part by decreased acquisition-related costs and sales commissions.

Revenues increased $49.1 million in fiscal 2020 compared to fiscal 2019 due to increased revenues from both our IoT products and Infrastructure and automotive products.

Gross profit increased $17.2 million during the same period due primarily to increased product sales.

Gross margin decreased to 59.5% in fiscal 2020 compared to 60.9% in fiscal 2019 primarily due to variations in product mix.

Operating expenses increased $35.6 million in fiscal 2020 compared to fiscal 2019 due primarily to increased personnel-related expenses, new product introduction costs, amortization of intangible assets and occupancy costs.

Operating income in fiscal 2020 was $38.3 million compared to $56.7 million in fiscal 2019.

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Net cash provided by operating activities was $135.7 million during fiscal 2020.

Accounts receivable was $75.6 million at December 28, 2019, representing 31 days sales outstanding (DSO).

Inventory was $73.1 million at December 28, 2019, representing 76 days of inventory (DOI).

Accounts receivable were $95.2 million at January 2, 2021, representing 35 days sales outstanding (DSO).

Inventory was $66.7 million at January 2, 2021, representing 59 days of inventory (DOI).

In fiscal 2020, we repurchased 0.2 million shares of our common stock for $16.3 million.

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

In October 2019, we acquired IEEE 1588 precision time protocol (PTP) software and module assets from Qulsar.

This complementary portfolio simplifies adoption of IEEE 1588 synchronization in 5G wireless, transport and access networks.

In fiscal 2019, we introduced new highly integrated Wireless Gecko modules that streamline secure IoT product design;

a portfolio of automotive grade timing solutions designed to meet the demanding clocking needs of in-vehicle systems;

robust isolated smart switches designed to drive loads in harsh industrial environments;

hybrid software-defined radio (SDR) tuners supporting global digital radio standards with a common platform;

5G-ready jitter attenuators with new device options featuring a fully integrated crystal;

the next generation of our Wireless Gecko platform, Series 2, designed to make IoT products more powerful, efficient and reliable;

a portfolio of timing solutions that provide superior jitter performance and meet the latest generation PCI Express ® (PCIe ® ) 5.0 specification;

isolation products designed to provide precise current and voltage measurement with very low temperature drift;

new Bluetooth software for our Wireless Gecko portfolio that increases location services accuracy;

and Wi-Fi modules and transceivers that cut power consumption for IoT applications.

On April 28, 2020, we acquired the Wi-Fi and Bluetooth business of Redpine Signals for approximately $317 million in cash.

We believe the acquisition will accelerate our roadmap for Wi-Fi and Bluetooth silicon and software solutions.

In fiscal 2020, we introduced a Z-Wave Long Range (LR) solution enabling one mile connectivity for Z-Wave 700 Series products;

highly integrated modules designed to simplify implementation of IEEE 1588 in communications, smart grid, financial trading and industrial applications;

new isolated gate drivers that cut latency by 50 percent while significantly increasing transient immunity;

new small form-factor, high-performance crystal oscillators (XOs) and voltage-controlled crystal oscillators (VCXOs) for applications that require low jitter and frequency-flexible clock synthesis;

a Bluetooth Low Energy system-in-package (SiP) that adds turnkey Bluetooth connectivity to extremely small products;

a major upgrade to our Integrated Developer Environment (IDE) with the launch of Simplicity Studio 5;

energy-friendly power management ICs (PMICs) that enhance the energy efficiency of battery-powered applications;

a Power over Ethernet (PoE) portfolio that reduces the cost and complexity of adding 90 W PoE to power sourcing equipment (PSE) and powered devices (PD);

Secure Vault technology, an award-winning suite of state-of-the-art security with features designed to help connected device manufacturers address escalating IoT security threats and regulatory pressures;

secure, proprietary wireless system-on-chip (SoC) devices designed for power- and size-constrained IoT products such as electronic shelf labels;

secure, ultra-low-power SoCs optimized for Zigbee Green Power applications powered by coin cell batteries or energy-harvesting sources;

and a Bluetooth SoC solution delivering a combination of security features, wireless performance, energy efficiency, and software tools and stacks to meet the market demand for high-volume, battery-powered IoT products.

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

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

Two of our distributors who sell to our customers, Arrow Electronics and Edom Technology, each represented 26% and 20% of our revenues during fiscal 2019, and 21% and 17% of our revenues during fiscal 2018, respectively.

Edom, Avnet and Arrow, each represented 19%, 14% and 12% of our revenues during fiscal 2017, respectively.

Three of our distributors who sell to our customers, Arrow Electronics, Edom Technology and Sekorm, each represented 26%, 22% and 11% of our revenues during fiscal 2020, respectively.

Arrow and Edom, each represented 26% and 20% of our revenues during fiscal 2019, and 21% and 17% of our revenues during fiscal 2018, respectively.

The percentage of our revenues derived from outside of the United States was 90% in fiscal 2020, 87% in fiscal 2019 and 83% in fiscal 2018.

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Interest Income and Other, Net.

Interest income and other, net reflects interest earned on our cash, cash equivalents and investment balances, foreign currency remeasurement adjustments and other non-operating income and expenses.

Interest income and other, net reflects interest earned on our cash, cash equivalents and investment balances, foreign currency remeasurement adjustments, income or loss on equity method investments, and other non-operating income and expenses.

Interest Expense.

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Internet of Things

Infrastructure

The change in revenues in fiscal 2019 was due primarily to:

● Increased revenues of $24.4 million for our IoT products, due primarily to the addition of revenues from an acquisition and increased demand for our wireless products offset by decreased demand for our MCU products.

● Decreased revenues of $16.3 million for our Infrastructure products, due primarily to decreased demand for our timing and isolation products.

● Decreased revenues of $26.5 million for Broadcast products, due primarily to decreased demand for our consumer broadcast products and decreased demand for our automotive broadcast products.

● Decreased revenues of $12.3 million for our Access products, due primarily to decreased demand for our products and a decreasing market for such products.

Unit volumes of our products decreased by 3.8% and average selling prices increased by 0.2% compared to fiscal 2018.

Infrastructure and automotive

The change in revenues in fiscal 2020 was due to:

● Increased revenues of $25.5 million for our IoT products, due primarily to increased demand for our MCU products and wireless connectivity products and the addition of revenues from an acquisition.

● Increased revenues of $23.6 million for our Infrastructure and automotive products, due primarily to increased demand for our power and timing products.

The increase in revenues in fiscal 2020 was also due to an adjustment of $11.9 million resulting from a change in the assumptions used to estimate variable consideration.

Unit volumes of our products increased by 13.8% and average selling prices decreased by 6.7% compared to fiscal 2019.

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

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(in millions)

Gross profit decreased in fiscal 2019 due primarily to decreased product sales.

The change in gross profit in fiscal 2019 was due to decreases in gross profit of $20.8 million for our Infrastructure products, $13.2 million for our Broadcast products and $8.0 million for our Access products, offset by an increase in gross profit of $30.9 million for our Internet of Things products.

Gross profit in fiscal 2018 included $6.1 million in acquisition-related charges for the fair value write-up associated with acquired inventory.

Gross margin increased in fiscal 2019 primarily due to the impact of the fair value write-up associated with acquired inventory in fiscal 2018.

The increase in gross margin in fiscal 2019 was offset in part by a decrease in gross margin resulting from variations in product mix.

Gross profit increased in fiscal 2020 due primarily to increased product sales.

The change in gross profit in fiscal 2020 was due to an increase in gross profit of $11.7 million for our Infrastructure and automotive products and $5.5 million for our Internet of Things products.

Gross margin decreased in fiscal 2020 primarily due to lower gross margins on our IoT products.

Gross margin declines resulted primarily from lower average selling prices on such products in fiscal 2020.

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

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Percent of revenue

The increase in research and development expense in fiscal 2019 was primarily due to increases of $13.7 million for personnel-related expenses, including costs associated with increased headcount and an acquisition, $2.8 million for occupancy costs and $2.2 million for the amortization of intangible assets.

The increase in research and development expense in fiscal 2020 was primarily due to increases of $18.5 million for personnel-related expenses, including costs associated with increased headcount and an acquisition, $5.5 million for new product introduction costs, $3.7 million for the amortization of intangible assets and $1.0 million for occupancy costs.

We expect that research and development expense will increase in absolute dollars in the first quarter of 2021 compared to the fourth quarter of 2020.

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Percent of revenue

The decrease in selling, general and administrative expense in fiscal 2019 was primarily due to decreases of $2.0 million for acquisition-related costs and $1.0 million for sales commissions.

The decrease in selling, general and administrative expense was offset in part by an increase of $1.8 million for personnel-related expenses, including costs associated with increased headcount and an acquisition.

We expect that selling, general and administrative expense will increase in absolute dollars in the first quarter of 2020 compared to the fourth quarter of 2019.

The increase in selling, general and administrative expense in fiscal 2020 was primarily due to an increase of $4.4 million for personnel-related expenses, including costs associated with increased headcount.

We expect that selling, general and administrative expense will remain relatively stable in absolute dollars in the first quarter of 2021 compared to the fourth quarter of 2020.

Interest Income and Other, Net

Interest income and other, net in fiscal 2020 was $11.1 million compared to $13.2 million in fiscal 2019.

The increase in interest income and other, net in fiscal 2019 was primarily due to increased interest income earned as a result of higher market interest rates and higher investment balances.

The decrease in interest income and other, net in fiscal 2020 was primarily due to lower interest rates on the underlying instruments, offset by a net gain of $1.8 million recorded in connection an equity investment.

Interest Expense

Interest expense in fiscal 2019 was relatively flat at $20.2 million compared to $19.7 million in fiscal 2018.

Interest expense in fiscal 2020 was $34.1 million compared to $20.2 million in fiscal 2019.

The increase in interest expense in fiscal 2020 was primarily due to a net increase of $8.0 million in interest resulting from an increase in the aggregate balance of notes outstanding and a loss of $4.1 million recorded on the early extinguishment of a portion of the 2022 Notes.

Provision (Benefit) for Income Taxes

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Effective tax rate

The effective tax rate for fiscal 2019 increased from fiscal 2018 primarily due to a change in our financial statement position related to the treatment of stock-based compensation within our intercompany cost-sharing arrangement.

Due to the Ninth Circuit’s reversal of the Altera Corp v.

Commissioner Tax Court decision, we are no longer reflecting a net tax benefit within our financial statements related to the removal of stock-based compensation from our intercompany cost-sharing arrangement.

As such, we recognized incremental, discrete income tax expense of $27.2 million in fiscal 2019 related to this change.

The decrease in the effective tax rate for fiscal 2020 as compared to fiscal 2019 was primarily due to the impact in fiscal 2019 of a change in our position related to the treatment of stock-based compensation within our intercompany cost-sharing arrangement offset by the increased impact of fiscal 2020 permanent tax differences.

The incremental, discrete income tax expense recognized in fiscal 2019 for the cost-sharing change was $27.2 million.

The effective tax rates for each of the periods presented differ from the U.S.

federal statutory tax rates of 21% due to the aforementioned impact of the Altera decision, the amount of income earned in foreign jurisdictions where the tax rate may be higher or lower than the federal statutory tax rate, and other permanent items including research and development tax credits and GILTI, or global intangible low-tax income.

federal statutory tax rates of 21% due to the amount of income earned in foreign jurisdictions where the tax rate may be higher or lower than the federal statutory tax rate, and other permanent items including research and development tax credits, the tax effects of stock-based compensation and global intangible low-tax income (“GILTI”).

Comparison of Fiscal 2019 to Fiscal 2018

(in millions)

Internet of Things

Infrastructure

The change in revenues in fiscal 2018 was due primarily to:

● Increased revenues of $68.8 million for our IoT products, due primarily to increased demand for our wireless products and the addition of revenues from an acquisition.

● Increased revenues of $47.3 million for our Infrastructure products, due primarily to increased demand for our isolation and timing products.

● Decreased revenues of $11.6 million for Broadcast products, due primarily to decreases in the market for our consumer products.

● Decreased revenues of $5.1 million for our Access products, due primarily to decreased demand for our VoIP products and decreases in the market for such products.

Unit volumes of our products increased by 11.5% and average selling prices increased by 1.1% compared to fiscal 2017.

(in millions)

Gross profit increased in fiscal 2018 due primarily to increased product sales.

The increased dollar amount of gross profit in fiscal 2018 was due to increases in gross profit of $42.8 million for our Internet of Things products and $34.6 million for our Infrastructure products, offset by decreases in gross profit of $8.5 million for our Broadcast products and $1.7 million for our Access products.

Gross profit in fiscal 2018 included $6.1 million in acquisition-related charges for the fair value write-up associated with acquired inventory.

Gross margin increased in fiscal 2018 primarily due to a higher mix of Infrastructure products sold.

Research and Development

(in millions)

Research and development

Percent of revenue

The increase in research and development expense in fiscal 2018 was primarily due to increases of $16.5 million for personnel-related expenses, including costs associated with increased headcount and an acquisition, and $7.2 million for the amortization of intangible assets.

Selling, General and Administrative

(in millions)

Selling, general and administrative

Percent of revenue

The increase in selling, general and administrative expense in fiscal 2018 was primarily due to increases of $23.6 million for personnel-related expenses, including costs associated with increased headcount and an acquisition, $3.6 million for the amortization of intangible assets and $3.4 million for acquisition-related costs.

Interest Income and Other, Net

Interest income and other, net in fiscal 2018 was $6.6 million compared to $6.1 million in fiscal 2017.

The increase in interest income and other, net in fiscal 2018 was primarily due to increased interest income earned as a result of higher market interest rates and higher investment balances, offset by a net loss of $1.8 million recorded in connection with fair value adjustments to an equity investment.

Interest Expense

Interest expense in fiscal 2018 was $19.7 million compared to $14.1 million in fiscal 2017.

The increase in interest expense in fiscal 2018 was primarily due to increased interest expense of $3.8 million on our convertible debt, including amortization of the debt discount and debt issuance costs, as a result of recording a full year of interest expense in fiscal 2018 versus a partial year in fiscal 2017.

In addition, interest expense in fiscal 2017 was lower than fiscal 2018 due to a $2.0 million gain recorded in fiscal 2017 in connection with the termination of our interest rate swap agreement.

Provision (Benefit) for Income Taxes

(in millions)

Provision (benefit) for income taxes

Effective tax rate

The effective tax rate for fiscal 2018 decreased from fiscal 2017 primarily due to a reduction in the U.S.

federal statutory rate as well as the inclusion of one-time tax impacts recorded in 2017 from the enactment of the Tax Cuts and Jobs Act.

This overall decrease in the effective tax rate was offset by a decrease in the Company’s foreign tax rate benefit.

A discussion of changes in our results of operations from fiscal 2018 to fiscal 2019 has been omitted from this Form 10-K, but may be found in “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K filed with the Securities and Exchange Commission on January 29, 2020.

Business Outlook

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Effective tax rate

Diluted earnings (loss) per share

Diluted earnings per share

$0.05 to $0.15

Liquidity and Capital Resources

Our principal sources of liquidity as of December 28, 2019 consisted of $726.0 million in cash, cash equivalents and short-term investments, of which approximately $583.8 million was held by our U.S.

Our principal sources of liquidity as of January 2, 2021 consisted of $724.7 million in cash, cash equivalents and short-term investments, of which approximately $572.8 million was held by our U.S.

The remaining balance was held by our foreign subsidiaries.

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

government securities and variable-rate demand notes;

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

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

Treasury bills and U.S.

government securities;

corporate debt securities, which include asset-backed securities, corporate bonds, certificates of deposit and commercial paper;

and money market funds.

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Operating cash flows during fiscal 2019 reflect our net income of $19.3 million, adjustments of $147.8 million for depreciation, amortization, stock-based compensation and deferred income taxes, and a net cash outflow of $0.6 million due to changes in our operating assets and liabilities.

Accounts receivable increased to $75.6 million at December 28, 2019 from $73.2 million at December 29, 2018.

Accounts receivable increased to $95.2 million at January 2, 2021 from $75.6 million at December 28, 2019.

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

Our average DSO was 31 days at December 28, 2019 and December 29, 2018.

Inventory decreased to $73.1 million at December 28, 2019 from $75.0 million at December 29, 2018.

Our average DSO was 35 days at January 2, 2021 and 31 days at December 28, 2019.

Inventory decreased to $66.7 million at January 2, 2021 from $73.1 million at December 28, 2019.

Our inventory level is primarily impacted by our need to make purchase commitments to support forecasted demand and variations between forecasted and actual demand.

Our DOI was 76 days at December 28, 2019 and 79 days at December 29, 2018.

Our DOI was 59 days at January 2, 2021 and 76 days at December 28, 2019.

The decline in DOI was primarily due to lower inventory levels at January 2, 2021 resulting from supplier capacity constraints and higher demand for our products.

Investing Activities

Net cash used in investing activities was $361.0 million during fiscal 2020, compared to net cash used of $106.8 million during fiscal 2019.

The decrease in cash outflows was principally due to a decrease of $237.2 million in net payments for the acquisition of businesses, offset by a decrease of $157.8 million in net purchases and sales of marketable securities in the current period.

The increase in cash outflows was principally due to a payment of $316.8 million for the acquisition of the Wi-Fi and Bluetooth business of Redpine Signals, offset by a decrease in cash outflows of $57.4 million from net purchases and sales of marketable securities in fiscal 2020.

Net cash used in investing activities was $106.8 million during fiscal 2019, compared to net cash used of $197.0 million during fiscal 2018.

The decrease in cash outflows was principally due to an increase of $420.1 million in net purchases and sales of marketable securities, offset by an increase of $224.6 million in net payments for the acquisition of businesses.

We anticipate capital expenditures of approximately $23 to $27 million for fiscal 2020.

Additionally, as part of our growth strategy, we expect to evaluate opportunities to invest in or acquire other businesses, intellectual property or technologies that would complement or expand our current offerings, expand the breadth of our markets or enhance our technical capabilities.

The decrease in cash outflows was principally due to a decrease of $237.2 million in net payments for the acquisition of businesses, offset by an increase in cash outflows of $157.8 million in net purchases and sales of marketable securities in fiscal 2019.

Financing Activities

Net cash provided by financing activities was $200.9 million during fiscal 2020, compared to cash used of $29.6 million during fiscal 2019.

The increase in cash inflows was principally due to $845.0 million in proceeds from the issuance of debt and a decrease of $10.4 million for repurchases of our common stock, offset by $623.6 million in payments on debt in fiscal 2020.

Net cash used in financing activities was $29.6 million during fiscal 2019, compared to cash used of $48.8 million during fiscal 2018.

The decrease in cash outflows was principally due to a decrease of $12.6 million for repurchases of our common stock during fiscal 2019.

Our existing share repurchase program has an authorization amount of $200 million and a termination date of December 2020.

Net cash used in financing activities was $48.8 million during fiscal 2018, compared to net cash provided of $313.0 million during fiscal 2017.

The decrease in cash inflows was principally due to $389.5 million in net proceeds from the issuance of long-term debt during fiscal 2017 and an increase of $39.3 million for repurchases of our common stock during fiscal 2018, offset by a decrease of $72.5 million in payments on debt.

Our debt facilities include $400 million principal amount convertible senior notes (the “Notes”) and a $400 million revolving credit facility.

The Notes bear interest semi-annually at a rate of 1.375% per year and will mature on March 1, 2022, unless repurchased, redeemed or converted at an earlier date.

As of January 2, 2021, our debt included $535 million principal amount convertible senior notes (the “2025 Notes”) and $140.6 million principal amount convertible senior notes (the “2022 Notes”) and we had an undrawn $400 million revolving credit facility.

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

On March 27, 2020, we borrowed $310 million under the revolving credit facility.

On June 1, 2020, we used $310.0 million of the 2025 Notes proceeds to repay the revolving credit facility in full.

We used the remainder of the proceeds, along with cash on hand, to repurchase approximately $236.8 million aggregate principal amount of its outstanding 2022 Notes.

We had increased our borrowings as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic.

On January 6, 2021, we issued a notice of redemption for the remaining 2022 Notes.

The redemption will occur on March 22, 2021, unless earlier converted.

See Note 10, Debt , to the Consolidated Financial Statements for additional information.

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Contractual Obligations

The following table summarizes our contractual obligations as of December 28, 2019 (in thousands):

The following table summarizes our contractual obligations as of January 2, 2021 (in thousands):

Payments due by period

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Other long‑term obligations (5)

(1) Long-term debt obligations represent the principal portion of our convertible senior notes (the “Notes”).

The Notes mature on March 1, 2022, unless repurchased, redeemed or converted at an earlier date.

(2) Interest on our long-term debt obligations primarily represents contractual interest on the Notes, which bear interest semi-annually at a rate of 1.375% per year.

(1) Long-term debt obligations represent the principal portion of the 2022 Notes and 2025 Notes.

The remaining principal balance of the 2022 Notes will be redeemed in 2021, and, therefore, has been reclassified to short-term debt.

(2) Interest on our long-term debt obligations primarily represents contractual interest on the 2022 Notes and 2025 Notes.

Interest excludes non-cash amortization of the debt discount and debt issuance costs.

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(4) Purchase obligations include contractual arrangements in the form of purchase orders with suppliers where there is a fixed non-cancelable payment schedule or minimum payments due with a reduced delivery schedule.

(5) Other long-term obligations primarily represent non-current income taxes.

(5) Other long-term obligations primarily represent non-current income taxes and software license obligations.

We are unable to make a reasonably reliable estimate as to when or if cash settlement with taxing authorities will occur for our unrecognized tax benefits.

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Off-Balance Sheet Arrangements

As of December 28, 2019, we had no significant off-balance sheet arrangements.

As of January 2, 2021, we had no significant off-balance sheet arrangements.

Critical Accounting Policies and Estimates

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

The goodwill impairment test is a two-step process.

The first step of the impairment analysis compares our fair value to our net book value.

In determining fair value, the accounting guidance allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value.

If the fair value is less than the net book value, the second step of the analysis compares the implied fair value of our goodwill to its carrying amount.

If the carrying amount of goodwill exceeds its implied fair value, we recognize an impairment loss equal to that excess amount.

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

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

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

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

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

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

See Note 14, Revenues , to the Consolidated Financial Statements for additional information.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis