What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-11-24 compared with 2020-11-17 · 89 added, 74 removed, 110 unchanged (60% of the section changed)

5 unchanged sentences

Our highly innovative analog semiconductors are connecting people, places, and things spanning a number of new and previously unimagined applications within the aerospace, automotive, broadband, cellular infrastructure, connected home, entertainment and gaming, industrial, medical, military, smartphone, tablet, and wearable markets.

Our key customers include Amazon, Apple, Arris, Bose, Cisco, DJI, Ericsson, Foxconn, Garmin, Gemalto (a Thales company), General Electric, Fibocom, Google, Honeywell, Huawei, Itron, Lenovo, LG Electronics, Microsoft, Motorola, Netgear, Northrop Grumman, OPPO, Rockwell Collins, Samsung, Sierra Wireless, Sonos, Technicolor, VIVO, Xiaomi, and ZTE.

Impact of COVID-19

The COVID-19 pandemic and the resulting economic downturn are affecting business conditions in our industry.

Overall demand for our products has decreased as a result of the pandemic, which impacted our operating results for fiscal 2020.

The duration, severity, and future impact of the pandemic continue to be highly uncertain and could still result in significant disruptions to our business operations, including our supply chain, as well as negative impacts to our financial condition.

As a result of the temporary suspension of our operations in Mexicali, Mexico, for approximately two weeks in April 2020, we incurred a $23.4 million production utilization charge, as described below.

A renewed suspension of our operations in Mexicali, or a continued reduction in our production capacity due to employee quarantines, employee absenteeism, and restrictions on certain of our employees’ ability to work, would negatively impact our future operating results.

The duration, severity, and future impact of the pandemic, including as a result of more contagious variants of the virus that causes COVID-19, continue to be highly uncertain and could still result in significant disruptions to our business operations, as well as negative impacts to our financial condition.

The semiconductor industry is experiencing various supply constraints due to the pandemic.

While we are working with our global supply chain partners to mitigate this risk, the duration and extent of the supply chain disruptions remain uncertain.

RESULTS OF OPERATIONS

Fiscal Years Ended October 2, 2020, September 27, 2019, and September 28, 2018.

Fiscal Years Ended October 1, 2021, October 2, 2020, and September 27, 2019.

The following table sets forth the results of our operations expressed as a percentage of net revenue.

See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 27, 2019, filed with the SEC on November 14, 2019, as amended by Amendment No.

See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 2, 2020, filed with the SEC on November 17, 2020, as amended by Amendment No.

1 to such Annual Report on Form 10-K, filed with the SEC on January 29, 2021 (the “2020 10-K”), for Management’s Discussions and Analysis of Financial Condition and Results of Operations for the fiscal year ended September 27, 2019.

2020 September 27,

2021 October 2,

2020 September 27,

9 unchanged sentences

Operating income 31.6 26.6 28.2

Interest expense (0.3) — —

Other income (expense), net — — 0.3

3 unchanged sentences

During the fiscal year ended October 1, 2021, the following key factors contributed to our overall results of operations, financial position, and cash flows:

• Net revenue decreased 0.6% to $3,355.7 million, as compared to fiscal 2019.

This decrease in revenue was driven primarily by reduced demand resulting from Huawei continuing to remain on the Entity List.

Additionally, demand for our products was negatively impacted by the ongoing COVID-19 pandemic.

These decreases in revenue were partially offset by an increase in demand for our new 5G solutions being deployed across a growing set of customers.

• Our ending cash, cash equivalents and marketable securities balance decreased 9.5% to $980.0 million in fiscal 2020 from $1,082.2 million in fiscal 2019.

This decrease in cash, cash equivalents and marketable securities during fiscal 2020, was primarily the result of the repurchase of 6.3 million shares of common stock for $647.5 million, capital expenditures of $389.4 million, and dividend payments of $307.0 million, partially offset by cash generated from operations of $1,204.5 million.

• Net revenue increased 52.3% to $5,109.1 million, as compared to fiscal 2020.

This increase in revenue was driven primarily by an increase in overall demand for wireless connectivity products coupled with the onset of technology upgrade cycles, including for 5G and Wi-Fi 6 solutions.

Additionally, our average content per device for these next-generation solutions increased.

• Our ending cash, cash equivalents, and marketable securities balance increased 4.8% to $1,027.2 million as of October 1, 2021, from $980.0 million as of October 2, 2020.

The increase in cash, cash equivalents, and marketable securities during fiscal 2021 was primarily due to cash generated from operations of $1,772.0 million, the borrowing of $1,000.0 million in Term Loans, $500.0 million of Senior Notes due 2023 (the “2023 Notes”), $500.0 million of Senior Notes due 2026 (the “2026 Notes”), and $500.0 million of Senior Notes due 2031 (the “2031 Notes” and, together with the 2023 Notes and the 2026 Notes, the “Notes”), partially offset by payments for acquisitions of $2,751.0 million, capital expenditures of $637.8 million, dividend payments of $340.6 million, repayments of Term Loans of $250.0 million, and the repurchase of 1.4 million shares of common stock for $195.6 million.

Fiscal Years Ended

2020 Change September 27,

2021 Change October 2,

2020 Change September 27,

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We generally experience seasonal peaks during our fourth and first fiscal quarters (which correspond to the second half of the calendar year), primarily as a result of increased worldwide production of consumer electronics in anticipation of increased holiday sales, whereas our second and third fiscal quarters are typically lower and in line with seasonal industry trends.

The decrease in net revenue in fiscal 2020, as compared to fiscal 2019, was driven by reduced demand resulting from Huawei continuing to remain on the Entity List as well as the ongoing COVID-19 pandemic, partially offset by an increase in demand for our new 5G solutions being deployed across a growing set of customers.

The increase in net revenue in fiscal 2021, as compared to fiscal 2020, was driven by an increase in overall demand for wireless connectivity products coupled with the onset of technology upgrade cycles, including for 5G and Wi-Fi 6 solutions.

Additionally, our average content per device for these next-generation solutions increased.

For information regarding net revenue by geographic region and customer concentration, see Note 15 to Item 8 of this Annual Report on Form 10-K.

Fiscal Years Ended

2020 Change September 27,

2021 Change October 2,

2020 Change September 27,

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Our cost of goods sold consists primarily of purchased materials, labor, and overhead (including depreciation and share-based compensation expense) associated with product manufacturing.

Erosion of average selling prices of established products is typical of the semiconductor industry.

Consistent with trends in the industry, we anticipate that average selling prices for our established products will continue to decline over time.

As part of our normal course of business, we mitigate the gross margin impact of declining average selling prices with efforts to increase unit volumes, reduce material costs, improve manufacturing efficiencies, lower manufacturing costs of existing products and by introducing new and higher value-added products.

The increase in gross profit in fiscal 2020, as compared to fiscal 2019, was primarily the result of a favorable product mix, partially offset by lower unit volumes and lower average selling prices.

In addition, there was a $23.4 million production utilization charge in fiscal 2020, due to the temporary suspension of our operations in Mexicali in the government's effort to contain the COVID-19 pandemic.

This one-time charge was less than the $66.1 million inventory-related one-time charge incurred in fiscal 2019, due to lower expected demand as a result of Huawei being added to the Entity List.

As a result of these impacts, gross profit margin increased to 48.1% of net revenue for fiscal 2020, as compared to 47.5% in fiscal 2019.

As part of our normal course of business, we intend to improve gross profit with efforts to increase unit volumes, improve manufacturing efficiencies, lower manufacturing costs of existing products, and by introducing new and higher value-added products.

The increase in gross profit in fiscal 2021, as compared to fiscal 2020, was primarily the result of a favorable product mix and higher unit volumes with a gross profit impact of $950.2 million, partially offset by lower average selling prices and an increase in amortization of acquisition intangibles, including inventory step-up, as a result of the Acquisition completed during the period.

Gross profit as a percentage of net revenue is estimated to decrease in fiscal 2022 due to amortization of intangibles acquired during fiscal 2021.

Research and Development

Fiscal Years Ended

2020 Change September 27,

2021 Change October 2,

2020 Change September 27,

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Research and development expenses consist primarily of direct personnel costs including share-based compensation expense, costs for pre-production evaluation and testing of new devices, masks, engineering prototypes, and design tool costs.

The increase in research and development expense in fiscal 2020, as compared to fiscal 2019, was primarily related to an increase in employee-related share-based compensation expense due to higher performance achievement with respect to performance stock awards.

The increase in research and development expense in fiscal 2021, as compared to fiscal 2020, was primarily related to headcount-related expenses, including share-based compensation, as a result of our increased investment in developing new technologies and products.

Selling, General, and Administrative

Fiscal Years Ended

2020 Change September 27,

2021 Change October 2,

2020 Change September 27,

3 unchanged sentences

Selling, general, and administrative expenses include legal and related costs, accounting, treasury, human resources, information systems, customer service, bad debt expense, sales commissions, share-based compensation expense, advertising, marketing, costs associated with business combinations completed or contemplated during the period, and other costs.

The increase in selling, general, and administrative expenses in fiscal 2020, as compared to fiscal 2019, was primarily related to increases in employee-related share-based compensation expense due to higher performance achievement with respect to performance stock awards.

The increase in selling, general, and administrative expenses in fiscal 2021, as compared to fiscal 2020, was primarily related to increases in costs associated with the Acquisition completed during the period and increases in headcount-related expenses, including share-based compensation.

Amortization of Intangibles

Fiscal Years Ended

2020 Change September 27,

2021 Change October 2,

2020 Change September 27,

(dollars in millions)

Total amortization of intangibles, including inventory step-up 46.0 (18.9)% 56.7 112.4% 26.7

Amortization of intangibles $ 36.0 205.1% $ 11.8 (47.8)% $ 22.6

% of net revenue 0.7 % 0.4 % 0.7 %

The decrease in total amortization expense for fiscal 2020, as compared to fiscal 2019, was primarily related to fully amortized intangible assets that were acquired in prior years.

The increase in amortization expense for fiscal 2021, as compared to fiscal 2020, was primarily due to additional intangible assets acquired during fiscal 2021.

See Note 3 to Item 8 of this Annual Report on Form 10-K for a detailed discussion of intangible assets acquired.

Amortization expense is estimated to increase in fiscal 2022 due to amortization of intangibles acquired during fiscal 2021.

Restructuring, Impairment, and Other Charges

Fiscal Years Ended

2020 Change September 27,

2021 Change October 2,

2020 Change September 27,

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% of net revenue 0.2 % 0.4 % 0.2 %

Restructuring, impairment, and other charges incurred in fiscal 2021 were primarily related to an impairment on property, plant, and equipment.

Restructuring, impairment, and other charges incurred in fiscal 2020 were primarily related to the abandonment of a previously capitalized in-process research and development (“IPR&D”) project.

Restructuring, impairment, and other charges incurred in fiscal 2019 were primarily related to employee severance and other termination benefits as well as charges on a leased facility resulting from restructuring plans initiated during the period.

Provision for Income Taxes

Interest Expense

Fiscal Years Ended

2021 Change October 2,

2020 Change September 27,

(dollars in millions)

Interest expense $ (13.4) 100.0% $ — —% $ —

% of net revenue (0.3) % — % — %

The increase in interest expense for fiscal 2021, as compared to fiscal 2020, was due to the issuance of the Notes in May 2021 and the borrowing of the Term Loans (as defined below) in July 2021.

Interest expense is estimated to increase in fiscal 2022 as our average borrowings outstanding are expected to be higher than in fiscal 2021.

Provision for Income Taxes

Fiscal Years Ended

2021 Change October 2,

2020 Change September 27,

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% of net revenue 2.0 % 2.3 % 3.2 %

The annual effective tax rate for fiscal 2020 of 8.6% was less than the United States federal statutory rate of 21.0% primarily due to benefits of 9.7% related to foreign earnings taxed at a rate less than the United States federal rate, 4.6% related to benefits from the foreign derived intangible income (“FDII”) deduction, 1.2% related to stock windfall deductions, and 2.6% related to the recognition of federal research and development tax credits, partially offset by increases in income tax rate expense impact of 4.0% related to global intangible low-taxed income (“GILTI”) expense, and 1.1% related to a change in our tax reserves.

The decrease in the effective tax rate for fiscal 2020, as compared to the 11.2% effective rate for fiscal 2019, was primarily due to benefits related to favorable changes to GILTI and increased windfall tax deductions.

The annual effective tax rate for fiscal 2021 of 6.3% was less than the United States federal statutory rate of 21.0% resulting primarily from foreign earnings taxed at rates lower than the federal statutory rate, a benefit related to a change in the reserve for uncertain tax positions, a benefit from foreign-derived intangible income deduction (“FDII”), windfall tax deductions, research and development credits, and foreign tax credits, partially offset by a tax on global intangible low-taxed income (“GILTI”).

The decrease in the effective tax rate for fiscal 2021, as compared to the 11.2% effective rate for fiscal 2020, was primarily due to benefits related to favorable changes in the reserves for uncertain tax positions.

During fiscal 2021, we concluded an IRS examination of our federal income tax returns for fiscal 2015 and 2016.

With the conclusion of the audit, we decreased the reserve for uncertain tax positions, including interest and penalties, which resulted in the recognition of an income tax benefit of $34.8 million in fiscal 2021.

In addition, the statute of limitations expired on the federal income tax return for fiscal 2017 and, as a result, we decreased the related reserve for uncertain tax positions of $25.5 million.

The increase in income tax expense in fiscal 2021, as compared to fiscal 2020, was primarily due to increased income from operations, partially offset by a decrease in the reserve for uncertain tax positions.

See Note 9 to Item 8 of this Annual Report on Form 10-K for additional information regarding income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Set forth below is a summary of our cash flows for the periods indicated:

Fiscal Years Ended

(in millions) October 1,

2020 September 27,

2021 October 2,

2020 September 27,

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Net cash used in investing activities (3,133.2) (581.4) (336.9)

Net cash used in financing activities (907.7) (912.5) (993.7)

Net cash provided by (used in) financing activities 1,677.4 (907.7) (912.5)

Cash and cash equivalents at end of period $ 882.9 $ 566.7 $ 851.3

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Cash provided by operating activities consists of net income for the period adjusted for certain non-cash items and changes in certain operating assets and liabilities.

The $162.9 million decrease in cash provided by operating activities for fiscal 2020, as compared to fiscal 2019, was primarily related to unfavorable changes in working capital.

The $567.5 million increase in cash provided by operating activities for fiscal 2021, as compared to fiscal 2020, was primarily related to a $683.5 million increase in net income, partially offset by $170.4 million of unfavorable changes in working capital, due primarily to an increase in accounts receivable which resulted from higher revenue during the period.

Cash used in investing activities:

Cash used in investing activities consists primarily of cash paid for acquisitions net of cash acquired, capital expenditures, purchased intangibles, and cash related to the sale or maturity of marketable securities.

The $244.5 million increase in cash used in investing activities for fiscal 2020, as compared to fiscal 2019, was primarily related to a $269.3 million difference in the net purchase and sale of marketable securities, partially offset by a $9.0 million decrease in cash used for capital expenditures.

Cash used in financing activities:

Cash used in financing activities consists primarily of cash transactions related to equity.

The $4.8 million decrease in cash used in financing activities for fiscal 2020, as compared to fiscal 2019, was primarily related to an increase of $35.0 million in net proceeds from employee stock option exercises and a decrease of $10.1 million in stock repurchase activity.

These decreases in cash used in financing activities were partially offset by an increase of $33.1 million in dividend payments and an increase of $10.3 million related to the minimum statutory payroll tax withholdings upon vesting of employee performance and restricted stock awards.

Cash, cash equivalents and marketable securities totaled $980.0 million as of October 2, 2020, representing a decrease of $102.3 million from September 27, 2019.

The decrease resulted from $647.5 million used to repurchase 6.3 million shares of stock, $389.4 million in capital expenditures, and $307.0 million in cash dividend payments, which was partially offset by $1,204.5 million in cash generated from operations during fiscal 2020.

Based on our historical results of operations, we expect that our cash, cash equivalents and marketable securities on hand and the cash we expect to generate from operations will be sufficient to fund our research and development, capital expenditures, potential acquisitions, working capital, quarterly cash dividend payments (if such dividends are declared by the Board of Directors), outstanding commitments and other liquidity requirements associated with existing operations for at least the next 12 months.

However, we cannot be certain that our cash on hand and cash generated from operations will be available in the future to fund all of our capital and operating requirements.

In addition, any future strategic investments and acquisitions may require additional cash and capital resources.

Cash used in investing activities consists primarily of cash paid for acquisitions, capital expenditures, purchased intangibles, and marketable securities, offset by cash received related to the sale or maturity of marketable securities.

The $2,551.8 million increase in cash used in investing activities for fiscal 2021, as compared to fiscal 2020, was primarily related to a $2,751.0 million increase in cash paid for acquisitions and a $248.4 million increase in cash used for capital expenditures, partially offset by $452.8 million cash provided by the net sales of marketable securities.

Cash provided by financing activities:

Cash provided by financing activities consists primarily of proceeds and payments related to our long-term borrowings and cash transactions related to equity.

The $2,585.1 million increase in cash provided by financing activities for fiscal 2021, as compared to fiscal 2020, was primarily related to an increase of $2,488.1 million in long-term debt issued and a decrease of $451.9 million in stock repurchase activity, partially offset by repayments of Term Loans of $250.0 million, a decrease of $45.5 million in net proceeds from employee stock option exercises, an increase of $33.6 million in dividend payments, and an increase of $22.1 million related to the minimum statutory payroll tax withholdings upon vesting of employee performance and restricted stock awards.

Cash, cash equivalents, and marketable securities totaled $1,027.2 million as of October 1, 2021, representing an increase of $47.3 million from October 2, 2020.

We have outstanding $500.0 million of Notes Due 2023, $500.0 million of Notes Due 2026, and $500.0 million of Notes Due 2031.

We have a term credit agreement (the “Term Credit Agreement”) providing for a $1.0 billion term loan facility (the “Term Loan Facility”).

On July 26, 2021, the Company borrowed $1.0 billion in aggregate principal amount of term loans (the “Term Loans”) under the Term Loan Facility to finance a portion of the purchase price for the Acquisition and to pay fees and expenses incurred in connection therewith.

During fiscal 2021, the Company repaid $250.0 million of outstanding borrowings under the Term Loans.

As of October 1, 2021, there were $750.0 million of borrowings outstanding under the Term Credit Agreement.

We have a Revolving Credit Agreement (the “Revolving Credit Agreement”) under which we may borrow up to $750.0 million for general corporate purposes and working capital needs of the Company and its subsidiaries.

As of October 1, 2021, there were no borrowings outstanding under the revolving credit facility (the “Revolver”).

The Revolving Credit Agreement expires July 26, 2026.

For a description of contractual obligations, such as taxes, leases, and debt, see Note 9, Note 11, and Note 17 to Item 8 of this Annual Report on Form 10-K, respectively.

Based on our historical results of operations, we expect that our cash, cash equivalents, and marketable securities on hand, and the cash we expect to generate from operations, and funds from our Revolver, will be sufficient to fund our short-term and long-term liquidity requirements primarily arising from:

research and development, capital expenditures, potential acquisitions, working capital, quarterly cash dividend payments (if such dividends are declared by the Board of Directors), outstanding commitments, and other liquidity requirements associated with existing operations.

However, we cannot be certain that our cash on hand, cash generated from operations, and funds from our Revolver will be available in the future to fund all of our capital and operating requirements.

In addition, any future strategic investments and significant acquisitions may require additional

cash and capital resources.

If we are unable to obtain sufficient cash or capital to meet our needs on a timely basis and on favorable terms, our business and operations could be materially and adversely affected.

Our invested cash balances primarily consist of highly liquid marketable securities that are available to meet near-term cash requirements including:

term deposits, certificate of deposits, money market funds, U.S.

term deposits, certificates of deposit, money market funds, U.S.

Treasury securities, agency securities, corporate debt securities, and commercial paper.

OFF-BALANCE SHEET ARRANGEMENTS

All significant contractual obligations are recorded on our consolidated balance sheet or fully disclosed in the notes to our consolidated financial statements.

We have no material off-balance sheet arrangements as defined in SEC Regulation S-K Item 303(a)(4)(ii).

CONTRACTUAL CASH FLOWS

Set forth below is a summary of our contractual payment obligations related to our operating leases, other commitments, and long-term liabilities at October 2, 2020 (in millions):

Payments Due By Period

Less Than 1 Year

Other long-term liabilities (1) $ 310.1 $ 19.1 $ 38.2 $ 38.2 $ 214.6

Operating lease obligations 203.4 25.7 53.8 42.3 81.6

Other commitments (2) 11.5 8.0 3.5 — —

Total $ 525.0 $ 52.8 $ 95.5 $ 80.5 $ 296.2

_________________________

(1) Other long-term liabilities primarily include our gross unrecognized tax benefits, repatriation tax payable, and executive deferred compensation.

Gross unrecognized tax benefits and executive deferred compensation are both classified as beyond five years due to the uncertain nature of the liabilities.

(2) Other commitments consist of contractual license and royalty payments and other purchase obligations.

CRITICAL ACCOUNTING ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP.

The preparation of these financial statements requires us to make estimates and judgments in applying our most critical accounting policies that can have a significant impact on the results we report in our financial statements.

2 unchanged sentences

inventory valuation, which impacts the cost of goods sold and gross margin;

assessment of goodwill and long-lived assets, which impacts the impairment of the respective assets;

share-based compensation, which impacts cost of goods sold and operating expenses;

loss contingencies, which impacts operating expenses;

business combinations, which impacts the fair value of acquired assets and assumed liabilities;

and income taxes, which impacts the income tax provision.

4 unchanged sentences

We recognize revenue in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 606 Revenue from Contracts with Customers net of estimated reserves .

Our revenue reserves contain uncertainties because they require management to make assumptions and to apply judgment to estimate the value of future credits to customers for product returns, price protection and stock rotation for products sold to certain electronic component distributors.

We base these estimates on the expected value method considering all reasonably available information, including our historical experience and current expectations, and is reflected in the transaction price when sales are recorded.

Our revenue reserves contain uncertainties because they require management to make assumptions and to apply judgment to estimate the value of future credits to customers for product returns, price protection, price adjustments, and stock rotation for products sold to certain electronic component distributors.

We base these estimates on the expected value method considering all reasonably available information, including our historical experience and current expectations, and are reflected in the transaction price when sales are recorded.

Inventory Valuation .

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We record an amount as an estimate of probable additional income tax liability at the largest amount that we feel is more likely than not, based upon the technical merits of the position, to be sustained upon audit by the relevant tax authority.

OTHER MATTERS

Inflation did not have a material impact on our results of operations during the three-year period ended October 2, 2020.

Business Combinations .

We allocate the fair value of the purchase consideration of a business acquisition to the tangible assets, liabilities, and intangible assets acquired, including IPR&D, based on their estimated fair values.

The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter.

When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life.

Our valuation of acquired assets and assumed liabilities requires significant estimates, especially with respect to intangible assets.

The valuation of intangible assets, in particular, requires that we use valuation techniques such as the income approach.

The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates:

future expected revenue, expenses, capital expenditures and other costs, and discount rates.

We estimate the fair value based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

For finite-lived intangible assets valued during fiscal 2021, a hypothetical change of ten percent to our valuation estimate would impact amortization of acquisition intangibles by $106.0 million over a weighted-average amortization period of 4.4 years.

Estimates associated with

the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.

Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

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