What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-28 compared with 2021-04-28 · 85 added, 70 removed, 212 unchanged (42% of the section changed)

6 unchanged sentences

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

Our first quarter of fiscal 2020 ended April 3, 2021.

Our first quarter of fiscal 2019 ended April 4, 2020.

Our second quarter of fiscal 2021 ended July 3, 2021.

Our second quarter of fiscal 2020 ended July 4, 2020.

Impact of COVID-19

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

Our award-winning technologies are shaping the future of the Internet of Things (IoT), internet infrastructure, industrial automation, consumer and automotive markets.

Our award-winning technologies are shaping the future of the Internet of Things (IoT), industrial automation and consumer markets.

Our world-class engineering team creates products focused on performance, energy savings, connectivity and simplicity.

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Our expertise in analog-intensive, high-performance, mixed-signal ICs and software enables us to develop highly differentiated solutions that address multiple markets.

We group our products into the following categories:

● 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).

Our Internet of Things products include wireless connectivity, microcontroller (MCU) and sensor products.

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

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

Current Period Highlights

Revenues increased $40.6 million in the recent quarter compared to the first quarter of fiscal 2020 primarily due to increased revenues from our IoT products.

Discontinued Operation

On April 22, 2021, we entered into an Asset Purchase Agreement pursuant to which Skyworks Solutions agreed to acquire certain assets, rights, and properties, and assume certain liabilities, comprising our infrastructure and automotive business for $2.75 billion in cash.

The sale was completed pursuant to the terms of the Agreement on July 26, 2021.

The results of operations of the sold component have been presented in the accompanying condensed consolidated financial statements as discontinued operations.

Current Period Highlights of Continuing Operations

Revenues increased $55.1 million in the recent quarter compared to the second quarter of fiscal 2020 primarily due to increased demand for our products.

Gross profit increased $29.7 million during the same period due primarily to increased product sales.

Gross margin decreased to 58.9% in the recent quarter compared to 60.1% in the first quarter of fiscal 2020 due primarily to variations in product mix.

Operating expenses increased by $3.2 million in the recent quarter compared to the first quarter of fiscal 2020 due primarily to increased new product introduction costs, amortization of intangible assets and personnel-related expenses, offset in part by decreased promotional and marketing expenses.

Operating income in the recent quarter was $22.2 million compared to $3.9 million in the first quarter of fiscal 2020.

We ended the first quarter with $572.9 million in cash, cash equivalents and short-term investments.

Net cash provided by operating activities was $14.5 million during the recent three-month period.

Accounts receivable was $103.7 million at April 3, 2021, representing 37 days sales outstanding (DSO).

Inventory was $79.2 million at April 3, 2021, representing 68 days of inventory (DOI).

During the first quarter, we paid $140.6 million in cash and issued 528,022 shares of common stock in connection with the redemption of the remaining principal of our 2022 convertible senior notes.

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 the first three months of fiscal 2021, we introduced a new 32-bit MCU on our award-winning xG22 platform for IoT edge applications;

a new isolated gate driver board designed to simplify the development of systems using power modules;

and new SmartClock™ technology for our automotive timing solutions.

During the three months ended April 3, 2021, we had no customer that represented more than 10% of our revenues.

Gross margin decreased to 56.8% in the recent quarter compared to 58.2% in the second quarter of fiscal 2020 due primarily to variations in product mix.

Operating expenses increased by $9.4 million in the recent quarter compared to the second quarter of fiscal 2020 due primarily to increased personnel-related expenses, new product introduction costs and amortization of intangible assets.

Operating loss in the recent quarter was $11.5 million compared to $31.8 million in the second quarter of fiscal 2020.

We ended the second quarter with $617.3 million in cash, cash equivalents and short-term investments.

Net cash provided by operating activities was $5.7 million during the recent six-month period.

Accounts receivable was $99.5 million at July 3, 2021, representing 53 days sales outstanding (DSO).

Inventory was $52.3 million at July 3, 2021, representing 64 days of inventory (DOI).

In the recent six-month period, we repurchased 0.1 million shares of our common stock for $19.0 million.

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

In the first six months of fiscal 2021, we introduced a fully integrated, certified Wi-SUN® solution simplifying Low Power Wide Area Network (LPWAN) deployment for smart cities;

wireless solutions for development of Matter end products that support Thread, Wi-Fi, and Bluetooth protocols;

and a new 32-bit MCU on our award-winning xG22 platform for IoT edge applications.

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

During the six months ended July 3, 2021, we had no customer that represented more than 10% of our revenues.

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

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

Two of our distributors who sell to our customers, Arrow Electronics and Edom Technology, each represented more than 10% of our revenues during the three months ended April 3, 2021.

The percentage of our revenues derived from outside of the United States was 90% during the three months ended April 3, 2021.

Three of our distributors who sell to our customers, Arrow Electronics, Edom Technology and Sekorm, each represented more than 10% of our revenues during the six months ended July 3, 2021.

The percentage of our revenues derived from outside of the United States was 89% during the six months ended July 3, 2021.

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

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Results of Operations

The following describes the line items set forth in our Condensed Consolidated Statements of Income:

The following describes the line items set forth in our Condensed Consolidated Statements of Operations:

Revenues are generated predominately by sales of our products.

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

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

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

Three Months Ended

Six Months Ended

Cost of revenues

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Operating expenses

Operating income

Operating loss

Other income (expense):

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Interest expense

Income before income taxes

Loss from continuing operations before income taxes

Provision (benefit) for income taxes

Loss from continuing operations

Income from discontinued operations, net of income taxes

Net income (loss)

Three Months Ended

Six Months Ended

(in millions)

Internet of Things

Infrastructure and automotive

The change in revenues in the recent three-month period was due to:

● Increased revenues of $40.1 million for our IoT products, due primarily to increased demand for our wireless connectivity products and MCU products and the addition of revenues from an acquisition.

● Increased revenues of $0.5 million for our Infrastructure and automotive products, due primarily to increased demand for our access products, offset by decreased demand for our timing products.

Unit volumes of our products increased by 32.9% and average selling prices decreased by 10.1% compared to the three months ended April 4, 2020.

The change in revenues in the recent three and six month periods was due to increased demand for our IoT products.

Unit volumes of our products increased by 50.7% while average selling prices decreased by 1.1% compared to the three months ended July 4, 2020.

Unit volumes of our products increased by 46.1% while average selling prices decreased by 2.9% compared to the six months ended July 4, 2020.

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

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Three Months Ended

Six Months Ended

(in millions)

Gross profit increased during the recent three month period due primarily to increased product sales.

The change in gross profit in the recent period was due to an increase in gross profit of $22.9 million for our Internet of Things products, partially offset by a decrease in gross profit of $1.4 million for our Infrastructure and automotive products.

Gross margin decreased primarily due to variations in product mix and lower gross margins on our Infrastructure and automotive products.

Gross margin declines resulted primarily from lower average selling prices in the recent period.

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

Gross margin decreased during the recent three and six month periods primarily due to variations in product mix.

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

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Three Months Ended

Six Months Ended

(in millions)

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Percent of revenue

The increase in research and development expense in the recent three month period was primarily due to increases of $2.0 million for new product introduction costs, $1.2 million for personnel-related expenses, including costs associated with increased headcount and an acquisition, and $1.2 million for the amortization of intangible assets.

We expect that research and development expense will increase in absolute dollars in the second quarter of fiscal 2021.

The increase in research and development expense in the recent three and six month periods was primarily due to increases of $3.4 million and $5.6 million, respectively, for personnel-related expenses, $2.2 million and $4.0 million, respectively, for new product development costs, and $0.2 million and $1.7 million, respectively, for the amortization of intangible assets.

We expect that research and development expense will increase in absolute dollars in the third quarter of fiscal 2021.

Selling, General and Administrative

Three Months Ended

Six Months Ended

(in millions)

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Percent of revenue

The decrease in selling, general and administrative expense in the recent three month period was primarily due to decreases of $1.0 million for promotional and marketing expenses and $0.7 million for personnel-related expenses.

We expect that selling, general and administrative expense will remain relatively stable in absolute dollars in the second quarter of fiscal 2021.

The increase in selling, general and administrative expense in the recent three-month period was primarily due to an increase of $2.5 million for personnel-related expenses.

The increase in selling, general and administrative expense in the recent six-month period was primarily due to an increase of $2.4 million for personnel-related expenses offset in part by a decrease of $1.6 million in acquisition-related costs.

We expect that selling, general and administrative expense will increase in absolute dollars in the third quarter of fiscal 2021.

Interest Income and Other, Net

Interest income and other, net for the three months ended April 3, 2021 was $2.9 million compared to $3.3 million for the three months ended April 4, 2020.

The decrease in interest income and other, net was primarily due to lower interest rates on the underlying instruments.

Interest income and other, net for the three and six months ended July 3, 2021 was $0.6 million and $3.5 million, respectively, compared to $3.3 million and $6.5 million for the three and six months ended July 4, 2020, respectively.

The decrease in interest income and other, net in the recent three and six month periods was primarily due to lower interest rates on the underlying investment instruments.

Interest Expense

Interest expense for the three months ended April 3, 2021 was $11.3 million compared to $5.5 million for the three months ended April 4, 2020.

The increase in interest expense in the recent three-month period was primarily due to a loss of $3.4 million recorded on the early extinguishment of the remaining 2022 Notes and a net increase of $2.4 million in interest resulting from an increase in the aggregate balance of notes outstanding.

Interest expense for the three and six months ended July 3, 2021 was $6.5 million and $17.8 million, respectively, compared to $11.8 million and $17.3 million for the three and six months ended July 4, 2020, respectively.

The decrease in interest expense in the recent three-month period was primarily due to a loss recorded on the early extinguishment of a portion of the 2022 notes recorded in the prior three-month period.

Provision (Benefit) for Income Taxes

Three Months Ended

Six Months Ended

(in millions)

1 unchanged sentence

Effective tax rate

The increase in the effective tax rate for the three months ended April 3, 2021 as compared to the prior period was primarily due to the decreased impact of excess tax benefits from stock-based compensation and federal research and development credits on increased pre-tax book income.

The increase in the provision for income taxes for the three and six months ended July 3, 2021 as compared to the prior periods was primarily due to the adoption of ASU 2019-12, Simplifying the Accounting for Income Taxes, during the six months ended July 3, 2021 and the required allocation of $9.6 million of tax benefits from continuing operations to discontinued operations in the fiscal 2021 periods.

Income from discontinued operations, net of income taxes

Three Months Ended

Six Months Ended

(in millions)

Income from discontinued operations, net of income taxes

The increase in income from discontinued operations, net of income taxes in the recent three and six month periods was primarily due to decreases in the provision for income taxes in the current periods.

See Note 2, Discontinued Operations , to the Condensed Consolidated Financial Statements for additional information.

Business Outlook

The following represents our business outlook for the second quarter of fiscal 2021.

The following represents our business outlook for the third quarter of fiscal 2021.

Income Statement Item

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Effective tax rate

Diluted earnings per share

Diluted loss per share

$(0.56) to $(0.46)

Liquidity and Capital Resources

Our principal sources of liquidity as of April 3, 2021 consisted of $572.9 million in cash, cash equivalents and short-term investments, of which approximately $401.7 million was held by our U.S.

Our principal sources of liquidity as of July 3, 2021 consisted of $617.3 million in cash, cash equivalents and short-term investments, of which approximately $430.6 million was held by our U.S.

The remaining balance was held by our foreign subsidiaries.

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Operating Activities

Net cash provided by operating activities was $14.5 million during the three months ended April 3, 2021, compared to net cash provided of $59.7 million during the three months ended April 4, 2020.

Operating cash flows during the three months ended April 3, 2021 reflect our net income of $13.5 million, adjustments of $36.7 million for depreciation, amortization, stock-based compensation and deferred income taxes, and a net cash outflow of $35.7 million due to changes in our operating assets and liabilities.

Accounts receivable increased to $103.7 million at April 3, 2021 from $95.2 million at January 2, 2021.

Net cash provided by operating activities was $5.7 million during the six months ended July 3, 2021, compared to net cash provided of $28.1 million during the six months ended July 4, 2020.

Operating cash flows during the six months ended July 3, 2021 reflect our net income of $33.4 million, adjustments of $(13.8) million for income from discontinued operations, depreciation, amortization, stock-based compensation and deferred income taxes, and a net cash outflow of $13.9 million due to changes in our operating assets and liabilities.

Accounts receivable increased to $99.5 million at July 3, 2021 from $95.2 million at January 2, 2021.

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

Our average DSO was 37 days at April 3, 2021 and 35 days at January 2, 2021.

Inventory increased to $79.2 million at April 3, 2021 from $66.7 million at January 2, 2021.

Our inventory level will vary based on the availability of supply as well as the impact of variations between forecasted demand used for purchasing inventory and actual demand.

Our DOI was 68 days at April 3, 2021 and 59 days at January 2, 2021.

Our average DSO was 53 days at July 3, 2021 and 59 days at January 2, 2021.

Inventory increased to $52.3 million at July 3, 2021 from $47.9 million at January 2, 2021.

Our inventory levels will vary based on the availability of supply as well as the impact of variations between forecasted demand used for purchasing inventory and actual demand.

Our DOI was 64 days at July 3, 2021 and 70 days at January 2, 2021.

Investing Activities

Net cash provided by investing activities was $146.4 million during the three months ended April 3, 2021, compared to net cash provided of $51.5 million during the three months ended April 4, 2020.

The increase in cash inflows was principally due to an increase in cash inflows of $97.1 million from net sales and purchases of marketable securities in the current period.

Net cash provided by investing activities was $194.9 million during the six months ended July 3, 2021, compared to net cash used of $270.9 million during the six months ended July 4, 2020.

The increase in cash inflows was principally due to a cash payment of $316.8 million for the acquisition of the Wi-Fi and Bluetooth business of Redpine Signals in the prior period and an increase in cash inflows of $150.5 million from net sales and purchases of marketable securities in the current period.

Financing Activities

Net cash used in financing activities was $158.4 million during the three months ended April 3, 2021, compared to net cash provided of $277.4 million during the three months ended April 4, 2020.

The decrease in cash inflows was principally due to $310 million in proceeds from our revolving line of credit in the prior period and $140.6 million in payments on debt in the current period, offset by a decrease of $16.3 million for repurchases of our common stock in the current period.

As of April 3, 2021, our debt included $535 million principal amount convertible senior notes (the “2025 Notes”) and we had an undrawn $400 million revolving credit facility.

Net cash used in financing activities was $170.9 million during the six months ended July 3, 2021, compared to net cash provided of $222.3 million during the six months ended July 4, 2020.

The decrease in cash inflows was principally due to $845.0 million in proceeds from the issuance of debt in the prior period, offset by a decrease of $456.9 million in payments on debt in the current period.

Discontinued Operations

Net cash provided by discontinued operations was $70.7 million during the six months ended July 3, 2021, compared to net cash provided of $71.1 million during the six months ended July 4, 2020.

As of July 3, 2021, our debt included $535 million principal amount of convertible senior notes (the “2025 Notes”).

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

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

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

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

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

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

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interest rates.

Our investment portfolio holdings as April 3, 2021 yielded less than 100 basis points.

A decline in yield to zero basis points on our investment portfolio holdings as of April 3, 2021 would decrease our future annual interest income by approximately $3.3 million.

Our investment portfolio holdings as July 3, 2021 yielded less than 100 basis points.

A decline in yield to zero basis points on our investment portfolio holdings as of July 3, 2021 would decrease our future annual interest income by approximately $2.7 million.

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

2 unchanged sentences

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

While we have drawn from the credit facility in the past, we have no borrowings as of April 3, 2021.

While we have drawn from the credit facility in the past, we have no borrowings as of July 3, 2021.

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

4 unchanged sentences

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

dollars are recorded in the Consolidated Statements of Income.

dollars are recorded in the Consolidated Statements of Operations.

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

1 unchanged sentence

Investments in Auction-rate Securities

As of April 3, 2021, we held $6.0 million par value auction-rate securities, all of which have experienced failed auctions because sell orders exceeded buy orders.

As of July 3, 2021, we held $6.0 million par value auction-rate securities, all of which have experienced failed auctions because sell orders exceeded buy orders.

We are unable to predict if these funds will become available before their maturity dates.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis